China Will First Invest And Then Revalue

Tuesday, July 19, 2005

Following the discussions on Brad Setser's and Brad DeLong's blogs about an imminent Yuan revaluation I am astounded that nearly everybody assumes the China export dragon will fly forever and even accelerate on that way while using all cash receipts to buy more US debt. Looking at the US deficits and the staggering consumer/mortgage debt I wonder if we will not see a rather abrupt shift towards foreign direct investments in the commodity sectors.
China already courts all those resource-rich countries considered pariahs in Washington, as laid out in this post. It has begun to build storage tanks for a national petroleum reserve, but has not yet said how much oil it wants to store. The diversification out of the dollar is already under way and I doubt it will be a purely monetary one. With such a huge domestic market they would be well advised to secure vital raw materials and commodities instead of inflation-prone dollars. Those who believe US CPI figures please raise their hands now.
Doubting the solidity of the jobless economic expansion in the US and seeing no solution to Europe's rising unemployment amidst a stagnant economy that now gets additionally burdened by record oil prices to be paid in a higher dollar I do not think China is so naive to gobble up ever bigger parts of the runaway money supply in the west. Their beginning foray into Africa and Russia makes much more sense than to accumulate ever more paper debt as they will have to master a huge energy problem. Undeveloped as Africa - and Russia - is, these countries can provide a pool of commodities that are a much better value in exchange for their goods imports than just paper promises of the "we pay you later" type.
As stated several weeks ago I still believe that China will also want to avoid a painful devaluation of their FX reserves which would cost them at least two Unocals. My guess is they will first go on an investing binge to reduce their dollar holdings, sell off parts of their most troubled banks and then revalue. For this reason they will stay with their standard explanation that they are considering a revaluation but "not now, please."
Kash at Angry Bear already gets carried away on the speculative article in the FT that started all the frenzy about the revaluation being just around the corner and thinks China will revalue to an extent of 10 percent. That would be four Unocals, to introduce a new currency into this discussion.
I think David Altig kept the coolest head. His headline and the first sentence said it all. "Is Remninbi Revaluation Imminent? According to the Financial Times, the Bush administration is saying "yes".
The Chinese have not moved half an inch in the last three years. They will manage to hide their true feelings well past the coming encounter of the two presidents this autumn. I want to remind everybody that the last head-on clash on May 10 between Treasury secretary John Snow and a Chineses delegation on May 10 started with lots of "revalue now" shouts and ended with the Treasury pulling back its claws. The Chinese were so offended that they did not even a set date for a next meeting. All this was only 10 weeks ago. I strongly doubt the Chinese measure periods of time in quarters when getting the dragon in shape for the next decades.


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