2012-06-30

How China will weaken the yuan

A good article by Andy Xie on China's problems. He doesn't discuss the value of the yuan, but we can extrapolate from his prediction.

Dealing with a Double Whammy

The reason for the above is that Western economies are falling. In the past, they lost jobs to China and borrowed to support consumption. China benefited from both, gaining jobs and exports. The double benefits covered up lots of domestic problems. As the bond market no longer supports such unsustainable spending in Western economies, their demand has fallen and China's exports have fallen with it. At the same time, China's market share of global trade is so high that increasing it is difficult because the West doesn't have many jobs left to shift to China. The double benefits China enjoyed have become a double whammy.

Without another export boom, China's domestic problems are exposed. If the government tries to stimulate the economy by increasing money supply, more inflation and declining efficiency will result because the stimulus money mostly ends up in the state sector and export revenue won't rise sufficiently to pay for rising inefficiency.
Given the increased internationalization of the yuan and Chinese investors main inflation fighting weapon being home purchases, the result will not be a mild inflation, but one that could potentially become hyperinflation.

No comments:

Post a Comment