Two Views On The Future Of The Yuan

President Barack Obama believes China is “manipulating” its currency, his choice to head the U.S. Treasury said on Thursday using a term the Bush administration had deliberately avoided for years to describe Beijing’s foreign exchange practices.Washington will “aggressively” use all its diplomatic tools to press Beijing to move faster on currency reform, New York Federal Reserve Bank President Geithner said in response to written questions from the Senate Finance Committee, which voted 18-5 on Thursday in favor of his nomination. Doug Palmer, Reuters


Investors now reluctantly accept that this recession is the worst since The Great Depression. But the one event from the 1930s investors hope will be repeated is that the inauguration of a new president will mark a similar 75% rally in the equity market. In the UK it is notable that despite the implosion of bank share prices, the market has been rallying outside of this sector. Yet beware: outright deflation has already arrived and world trade is collapsing. Korean GDP has just declined a MASSIVE annualised 21% in 2008 Q4! China is now joining the rest of the world in the stinking cesspit of uncontrolled economic slump. As other Asian currencies slide, the trade-weighted Yuan is rocketing up. The Yuan needs to be devalued.

I laughed out loud when the highly manipulated Chinese GDP data was released, showing Q4 growth at a 6.8% yoy rate after 9.0% in Q3 and a peak of 12.6% in 2007. That this out-turn was bang in line with the median estimate of economists surveyed by Bloomberg makes it all the more unbelievable in my mind. All other economic data worldwide have been surprising massively on the downside and China should be no exception. A few hours earlier, for example, South Korea reported Q4 GDP had declined a hefty 5.6% QoQ, massively worse than a ReuterÂ’s consensus which looked for a contraction of 2.7%! I naively thought that this QoQ decline was already annualized, but it was not. On a US style of reporting, the South Korean economy contracted at a 20% annualised rate in Q4. Asia is in depression. Whatever the heavily manipulated Chinese GDP is telling us, that economy must now be contracting. The Yuan needs to be devalued.
Albert Edwards, Societe Generale

Obviously something, somewhere, is dead set on collision course. And my feeling is that we won’t be too long getting there.

This entry was posted in A Fistful Of Euros, Economics and demography by Edward Hugh. Bookmark the permalink.

About Edward Hugh

Edward 'the bonobo is a Catalan economist of British extraction. After being born, brought-up and educated in the United Kingdom, Edward subsequently settled in Barcelona where he has now lived for over 15 years. As a consequence Edward considers himself to be "Catalan by adoption". He has also to some extent been "adopted by Catalonia", since throughout the current economic crisis he has been a constant voice on TV, radio and in the press arguing in favor of the need for some kind of internal devaluation if Spain wants to stay inside the Euro. By inclination he is a macro economist, but his obsession with trying to understand the economic impact of demographic changes has often taken him far from home, off and away from the more tranquil and placid pastures of the dismal science, into the bracken and thicket of demography, anthropology, biology, sociology and systems theory. All of which has lead him to ask himself whether Thomas Wolfe was not in fact right when he asserted that the fact of the matter is "you can never go home again".

2 thoughts on “Two Views On The Future Of The Yuan

  1. Hi Kenneth, well the link to the Doug Palmer piece is now in the text, but it is also all over this mornings newspaper.

    The Edwards’ piece is more difficult, since it is not online and you need a subscription to his Global Strategy Weekly at Societe Generale, which is a pity, since their research seems pretty much to the point at the moment, and deserves a wider circulation. The point about the Geithner view is that this is very much last years story, and that the Chinese authorities are now faced with either facing the wrath of their poor and huddled masses or the wrath of the White House, and I guess I have a pretty good idea which way they will go.

    Thus, I think the main fear of an clash between the US and China doesn’t come over the latter not buying US treasuries (if the dollar is rising and the yuan falling they would be mad not to do this) but from a float of the yuan with results which are not the expected ones.

    The Chinese are now considering the situation see below), I mean I doubt he intended to give them the excuse they may have been looking for to come off the peg, but you always need to be careful in case what you ask for is what you get, especially in a complex world like the one we presently live in.


    The People’s Bank of China, the central bank, had noted the comments by Geithner, a central bank official told Reuters on Friday.

    “We have reported them to relevant government departments and are awaiting a response,” the official said, declining to elaborate.

    Under U.S. law, formally labelling China a currency manipulator would require the Treasury to begin “expedited” negotiations with Beijing to reduce China’s huge trade surplus with the United States and eliminate any “unfair” currency advantage.

    “China is going to be extremely unhappy, to say the least,” Tao Xie, an expert on Sino-U.S. relations at the Beijing Foreign Studies University. “For administration officials, I do not think any one has ever pointed a finger so strongly at China.”

    Chinese anger at Geithner’s choice of words, written in response to questions at his Senate nomination hearing, will add to simmering tensions over the global financial crisis.

    “President Obama — backed by the conclusions of a broad range of economists — believes that China is manipulating its currency,” Geithner wrote.

    Chinese officials have accused the United States of regulatory failings that sparked the meltdown. When Henry Paulson, former U.S. Treasury chief, said that the high Chinese savings rate had helped sow the seeds of the crisis, a firestorm of criticism ensued in China.

Comments are closed.