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Bo Peng
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I run a fund based on automated trading and technical analysis. But my favorite pastime is thinking and talking about political economy. I guess I'm George Soros. Writing helps clarifying my thinking. All opinion expressed here is mine, wholly mine, nobody's but mine. And all trading/investment... More
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  • The Chimerica Love Story 0 comments
    Feb 14, 2010 2:29 AM
    I understand CNY valuation is a very convenient smoke screen and scapegoat, a handy political soundbyte. But does Washington really want CNY to rise in value against USD?
    First of all, a rise in CNY is a de facto devaluation of USD. Devaluing USD has its lure, being an easy way out of the mounting external debt. In fact, my bet is still that it's a path Washington cannot avoid going down. But here I try to temporarily escape political reality and hope for the best. As the rest of the world is not quite as stupid as some think, devaluing USD would make it much harder for US to sell debt. So it's not as easy as it first seems. But more importantly, the status of US rests squarely on the stability of USD. Some may say it's the military power but military power is derived from economic and financial power. I'll not argue here whether the persistent erosion in USD for the past decade, until 08 crisis, is a cause or effect of the decline in US power. But either way, it says one thing loud and clear: devaluation of USD is a bad thing for the US. Furthermore, external devaluation would lead to internal inflation and declining living standard.
    Of course, as we've seen repeatedly over the past decades, and especially the past two years, a world in trouble is a sure support for USD. But how long can we play with this fire before we get seriously burned?
    Some in Washington may be tempted to pull the same trick on China as they did to Japan in the 70's and 80's. It's not going to happen. Let's not kid ourselves. Japan was, and still is, not a sovereign. But China is not Japan. In the 80's certain powerful factions in China wanted to align it strategically with the US. But the US took a short-sighted utilitarian view of China after Berlin Wall collapse, and this is an ultimate reason the pro-western faction in Beijing lost, if not permanently then at least for a generation to come. Nobody in Beijing wants to be the enemy of the US. But the mainstream consensus is decidedly on strategic independence. For this reason, all the talk of CNY appreciation in Washington is nothing more than a domestic political talk show.
    The irony is, as I've argued for years now, that it is in China's best interest to let CNY appreciate gradually. Some in Beijing certainly realize this. But the export sector, especially the export of labor-intensive, low value-added products, is dominated by the Prince Party, an unofficial but universally (in China) known slang for the loosely knit aggregate of descendants of former high officials. It's a de facto institutionalized power succession model: top officials stay clean while they're in power, then after they step down, each family gets to control a sector of the economy. Furthermore, the Prince Party has been increasingly shifting their income to hard currencies in recent years (and storage thereof started much earlier). CNY appreciation would mean a direct hit to their wealth in Yuan terms. The Prince Party has been the most powerful lobby against CNY appreciation. But as one can easily see, the Prince Party power succession model is not sustainable over the long run. There'll be more and more factions among the Prince Party and their interests will more and more frequently come into collision. In fact, there've been a few signs in recent years that the factions for CNY appreciation have been gaining ground. If you think for a moment that the CNY appreciation a few years ago was due to external pressure, then sorry, you don't know anything about Chinese politics. External pressure was used as a bargaining chip in the internal debate, that's all.
    China needs to migrate up the value chain. It needs to gain more independence in various core industries. While infrastructure in China has enjoyed tremendous improvement over the last 20 years, the need for investment in some areas is still huge. And perhaps most importantly, it needs to attract talent from all of humanity. A depressed CNY value makes all the above much more difficult than necessary.
    So there you have it. US and China each argues for and urges the other to do the best for the other. What selfless love. What a Valentine's Day story. 

    Oh, Happy New Year everyone! Here's a Confucius Says on Year of Tiger: Bulls get slaughtered, bears get slaughtered, but the Tigger just keeps bouncin' and bouncin' and...

    Disclosure: None
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