China may allow the yuan to appreciate in "a bigger one-off move than people talk about,"...

China may allow the yuan to appreciate in "a bigger one-off move than people talk about," Goldman Sachs' Jim O'Neill says, probably by at least 5% to cool down the economy. "They may also consider having a wide band to let it move more frequently on the daily basis to stop speculative players.” (ETFs: CNY, CYB)

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  • Northern Dancer
    , contributor
    Comments (733) | Send Message
    Chinese banks have been lending money at an astonishing clip until recently. Apparently in the last 2 months, they've already loaned out half of what was expected for all of 2010. The government has called a stop to that practice, and now with this announcement it's become clear that China's going to rein in the amount of money creation. It's a move to put a halt to money creation, or inflation. So at the very least, this would be "dis-inflationary", perhaps the first steps toward a deflationary scenario. It's not really deflationary, but a step in that direction. With the Chinese markets already showing considerable weakness lately, this move might be a catalyst for further acceleration in that direction.


    A stronger yuan would mean a weaker USD, but only relative to the yuan. The current path of a stronger USD could probably continue considering that the European currencies are in worse shape than the dollar is. As John Mauldin said: "the US dollar is the worst currency in the world, except for all the others". So the way I see it is that a deflationary leaning is emerging in China and a deflationary era in the American markets is more likely than an inflationary one due to a stronger dollar and obvious credit contraction. At the very least, we've seen absolutely no credit expansion in the US. So a stronger yuan and a stronger dollar at the same time appears to be a real possibility now, and the markets aren't going to like it. I find it ironic that both currencies could be gaining strength at the same time, but for two completely different reasons.
    24 Jan 2010, 03:43 PM Reply Like
  • tripleblack
    , contributor
    Comments (13581) | Send Message
    5% is just the first taste.
    24 Jan 2010, 03:49 PM Reply Like
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