Over the recent weeks the strong political and economic situation in China did manifest itself in a rising confidence. Chinese officials are increasingly resistant to Western criticism on economic, political and moral grounds. The western influence in China is diminishing rapidly as the fast growing most populous country in the world displays its newly found strength.
This would mean that any calls for the revaluation of the Chinese currency will be met with disdain and refusal. The world cannot dictate the supposedly new leading super power how it has to run its economy. China perceives itself as the saviour of the world from the abyss of the economic disaster. A saviour is obviously without a fault. Thus any calls from US or the Western Europe for the currency revaluation would fall on deaf ears.
However, there could be a development of unintended consequences which may inevitably force the invisible economic hand. China was the global manufacturing hub for the last decade. It was supporting the unstoppable desire of the US consumer for manufactured goods. The consumer, as we know it now, was funded and supported by the debt spiral which caused one of the most vicious economic disasters of the last 100 years.
Now China needs to recalibrate its economy from export-orientated to consumer and domestically orientated. The manufacturing base exists to satisfy additional consumer demand and the consumer is not only supported by the growing consumer loan business in China but especially by the strong domestic economy fuelled by monstrous infrastructure projects which are providing new jobs and demand for locally manufactured goods.
The expectation is that the trade surplus will vanish over the coming quarters and a trade deficit will emerge. Thus export orientated economy may become slowly but steadily depended on imports putting more pressure on the call to revalue the currency. However it is likely that China will not give in to these calls.
On the other hand unexpectedly US-Dollar could become the mechanism which will discipline the Chinese currency independent of political decision. The Chinese currency is virtually pegged to the US-Dollar. Thus if and when US-Dollar strengthens the Yuan will strengthen accordingly. This would deliver the unintended consequences. The Chinese consumer would profit from cheaper imports. Domestic companies catering for the domestic consumer would become more competitive. Traditional exporters would have more incentives to focus on domestic demand. Chinese huge FX reserves and US debt pile would gain in value potentially supporting further economic strength. The goal of stronger Chinese currency could be reached without the Chinese government losing its face and actively deciding for the currency appreciation.
The consequences for US economy might be very different. However, at the moment it appears more that the world is turning into a kind of oligopoly with US and China its strongest players followed by India, Brazil and Russia in the second line. It would be an unexpected outcome if the greatest consumer of the last decades could turn into a manufacturing base for the former exporter with booming new consumption culture.
Disclosure: No positions