Prominent economist on China's re-valuation and bonds

by: Ezra Marbach

Barron's recently interviewed Martin Barnes, managing editor of the well-known Bank Credit Analyst report. Here are a number of extracts that relate to China's currency re-valuation and what may be in store for bonds (Barron's subscription required):


On Chinese currency re-valuation

....It wasn't a big move and we weren't expecting a big move. We've been in the camp that, from an economic perspective, it doesn't make any sense for China to revalue. They've got very low inflation and, if anything, a bit of a deflation problem in some sectors. In that environment, you don't want a strong currency, you want a weak currency. But, of course, with all the protectionist pressures building up in the U.S., they had to do something. They were backed into a corner.

....We thought they'd do as little as possible just to get the U.S. off their back and to try to minimize the impact on their economy. That's just what they've done. A 2% move is enough for the U.S. as a good start, and it holds out hope they will do more down the road. They won't be in any hurry to do anything else for quite some time, so the economic impact of it is not going to be much at all, but it was a big, important political gesture.

On China's future investment in bonds

....To the extent people are now thinking this is the first of many moves to revalue China's currency, you could see some speculative capital inflows moving into China on the back of expectations the currency is going to move up. If that is the case, and China needs to neutralize the effect of that, they will continue buying bonds. But it doesn't have to be U.S. bonds; it could be European bonds or other kinds of bonds. But to the extent that there are speculative inflows into China , China will have to keep recycling that money. The story of global money available to keep bond yields down isn't about to change anytime soon.

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