The Chinese RMB and the Euro 15 comments
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Two days ago I was in Shanghai speaking at a conference organized by a French bank. For some reason I was included in the panel discussing opportunities for Chinese investors in the euro market.
I suspect I was not the right person to have on that panel because my position on the subject is not likely to lead to a stampede of Chinese investments into euro-denominated products. First of all, I don’t think Chinese investors should buy any foreign currency product until the RMB issue has been resolved. With the expected appreciation of the RMB as high as it is, only extremely high-yielding, very risky foreign-currency-denominated assets can be expected to match the returns one can get by simply depositing RMB in a bank account. Why take the risk?
Second, I think the euro is overvalued relative to the dollar, and although we may see more dollar weakness in the short term, my own bet is that the euro will strengthen in the one- or two-year horizon as Europe’s trade deficit continues to swell. Lombard Street Research, a London-based research group and one of my favorites, expects the dollar’s fall to be more of a bungee jump, and they expect the rebound will occur once the markets see the European trade deficit as unsustainable and the euro’s position as precarious. I agree.
Finally, and this is really a much longer-term issue, I am still very skeptical about the survivability of the euro. It seems to me that the strains in the euro zone – especially in countries like Spain, where monetary policy is much too loose, and Italy, where sovereign debt levels are rapidly becoming unsustainable – will put serious pressure on the euro once we end the current liquidity cycle that we have experienced over the past 15-20 year.
I say this because we have some disturbing historical precedence. Currency unions among regions that don’t fulfill the Mundellian rules (including high degrees of capital and labor mobility and free trade) aren’t new. There are plenty of previous examples, but my reading of their histories is that when they are successful they are successful largely during the expansive period of a global liquidity cycle. I cannot think of any that didn’t hit the skids when the liquidity cycle ended. There are many reason why I think this makes sense, and perhaps in some future entry I will discuss why, but suffice it to say that as weaker eastern European countries with their more fragile balance sheets enter the euro the likelihood of a global liquidity contraction playing havoc with the members of the union rises. We still haven’t been seriously tested, and it is only after a really difficult test that we will be able to say with some confidence that the euro experiment has been a success.
Still, in spite of my nay-saying there are some China-related things that are relevant to a discussion of the euro and which I brought up in the conference. The main point, made by many other much smarter people besides me, is that the strength of the euro and other related currencies is significantly affected by the Chinese currency regime (actually by a number of dollar-related currency regimes of which China is the bellwether) because the euro’s strength was caused by the pressure for the dollar to devalue against the currencies of its trading partners, and as long as the RMB and other related currencies were pegged or managed, the full brunt of the adjustment had to occur in currencies where there was no massive central bank intervention – e.g. the euro.
If the US trade deficit is unsustainable, currencies have to realign so that the deficit becomes more manageable, and probably the healthiest way for that to happen is for the dollar to realign against the largest trade surplus countries – after all if trade surpluses do not decline, trade deficits cannot decline either. That means that the brunt of dollar weakness should have occurred against China, Japan, the OPEC countries and other Asian countries who peg to the dollar, to the extent that their trade surpluses decline. Only then can we see a reduction in the US trade deficit that doesn’t occur simply by shifting it elsewhere.
This hasn’t been allowed to happen. The US trade deficit is not disappearing, it is simply being shifted to Europe. I don’t think that can last very long.
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China has many problems on its own; but it's very ironic the red communists do not mind Mr Petti (who is paid salary by the Chinese communist run school) being so critical of everything in China even the air he breathes every day.
Another often repeated argument is "free market fx". It's at the very least intellectually dishonest. JPY is one of the most heavily managed currencies in modern memory. But look no further than the recent talks around USD vs EUR, or the 98 Asian crisis. Fx will always have a political, non-economic factor unless we go back to Brendon Woods. Let's not kid ourselves.
IMO, the weak dollar has two most important causes:
1. Our sustained, yet unsustainable, budget deficit, AND
2. Chronic deteriorating infrastructure -- if the deficit were due to proper heavy infrastructure investment, the dollar would not have been adversely affected due to the expected future return from such investments.
3. Recent government monetary and fiscal policies deliberately allowing (if not inducing) weak dollar, effectively devalue our debt and export inflation to net resource consumers pegged to USD (China, India, Japan).
金融界网站4月16日讯 在国家统计局公布今年3月份CPI同比增长8....
梁博士说，此次央行这么及时的上调存款准备... 的积极回应。央行也有自己的宏观经济研究小组，对于宏观经济有非常及时的把握，信贷规模上已经得到控制，所以央行此次的动作主要是为了抑制通货膨胀。
他说，各大银行的信贷规模和信贷增速已经被...
在谈到人民币汇率破7的时候，梁博士说，人...
关键词：准备金 CPI 央行 人民币 金融界
I might translate it for you guys if I have more free time.
梁博士说，此次央行这么及时的上调存款准备... 的积极回应。央行也有自己的宏观经济研究小组，对于宏观经济有非常及时的把握，信贷规模上已经得到控制，所以央行此次的动作主要是为了抑制通货膨胀。
他说，各大银行的信贷规模和信贷增速已经被...
在谈到人民币汇率破7的时候，梁博士说，人...
关键词：准备金 CPI 央行 人民币 金融界
It is time for Mr Petti and his loyal pupils to disclose his relationship with the red Chinese government now!!! And all readers on this site should also make such a demand; otherwise it's an insult to the intelligence of all seekingalpha readers!
great post prof. pettis. In response to your older writing about the unexpected pressure on Chinese inflation, can such inflation be linked to the exchange rate?
This is what I believe could be the possible linkage. A depreciation of the dollar implies a decreased global purchasing power of the us populus. This in turn significantly slows the growth of demand for chinese goods and services, which would limit the real GDP growth. If MV=PY, could it be that the rate at which the Chinese central bank was increasing the money supply significantly outpaced the real growth of the economy, leading to a much much larger increase in the price levels?
1. the biggest problem in China at the moment is it's grwoth is too fast as it pushes up the inflation.
2. That is why the PBOC has hiked the rates six times to slow the economy.
3. The conclusion is the slower growth in China either before or after Olympic is exactly China needs and will be great for Chinese long term sustainable growing economy.
At last, remember during the USA reccesion 2000 and 2003; China's economy still grew more than 10 % back then. So if you know nothing about history then I would say " go away and stop playing the market and leave your money under your bed".
If you guys read Ken Fisher; you will understand the most effective measure to overcome inflation is investing in advanced technology to lift productivity, it will take time and lots of capital. China might be lucky in that regard because the internet which makes techonology transfer much easier and cheaper around the world.
At last I agree not to talk about Petti if you guys back off talking down about China; I welcome any constructive criticism on China though! I love to help you guys to understand what is really going on in China so we all could make some serious money out of this great historical opportunity.
I hope Mr Pettis does not get depressed about this "Chinesepetti" fellow. Nothing Mr Pettis says is controversial - at least from an monetary economist perspective - so let's hope that he is not characteristic of mainstream Chinese statist thought. I look forward to Mr Pettis' columns. - Doug Roberts
Filthy air. Filthy water. Filthy politics. Filthy accounting procedures.
www.ds-shanghai.org.cn...
Don't invest in China.
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