Tan Yaling Sees More Dollar Strength

Key points from her article this week (Google translated):

Especially economic optimism data show a solid basis for the exchange rate, including employment rates, productivity and inflation rate seems to favor a stronger exchange rate

......Especially as debt sensitive period in September, the U.S. Treasury Department released data show that the size of the country's budget deficit this year in August to $ 129 billion, slightly lower than the previous estimate of $ 130 billion, when compared to August 2013 recorded a $ 148 billion deficit is reduced by about 13%. Data also show that the first 11 months of the 2013-14 fiscal year, America's total deficit of $ 589 billion, down from $ 755 billion over the same period of fiscal year 2012-13, which is also for the same period since the 2007-08 fiscal year the minimum size of the deficit before that massive economic crisis since. American economic improvement of the situation is reflected in all aspects of economic and financial, to give the dollar adjustment to bring up the full argument and reason. U.S. debt problems delayed hype has strong design and strategic factors.

...... Such as Italy, the third time since the 2008 recession, which many neighbors still trying to recover from the debt crisis of the same. To this end the EU finance ministers and the European Central Bank president Mario Draghi will be more focused on the European Central Bank 's latest move assist the economy and avoid deflation, which form a large negative pressure on the euro, the euro is the flow, adapt to technical requirements significantly. Coupled with then German economy is strong growth in the second quarter, subject to industrial output and construction support, but economic growth may be slowing after. Germany's central bank believes that more and more signs that economic growth is slowing.

This part shows the Chinese thinking on the U.S. dollar:

Strong dollar is not the price factor status and role, but the institutional and market factors, increased supply of dollars is the purpose of expansion and monopolize all global markets, the dollar market opportunity and the environment is the key.

Printing the dollar as part of a market share strategy: Triffin's dilemma from the opposite side.

She sees a rebound in foreign currencies coming, but dollar strength will continue.

From Hexun: 谭雅玲：美元上行加快存在汇率变化设计

Liu Jun Luo predicts 40% devaluation of renminbi in 2013

Liu Junluo's prediction of a crash in the gold market didn't come to pass, but he's sticking to that call. In general, he sees Romney winning and strengthening the U.S. economy, leading to an increase in real estate and assets prices, pulling in foreign capital and raising the value of the U.S. dollar—a net deflationary force on the global economy that will attract capital specifically from China.
罗姆尼大有希望啊！

我预计最迟2013年第三季度人民币贬值，如果，中国央行确实是拼命推移到那个时间段，人民币贬值那就应该是一次性贬值不低于40%。人民币如果发生一次性贬值，国内所有期货都可能在一次性贬值后的2~3月时间全部关闭。

He notes earlier in the piece that a lot of Chinese gold was purchased at high prices and he's specifically looking at the futures market. He obviously recommends investors hold U.S. dollars, but if they are in gold they will not see the renminbi price collapse in the end.

I don't agree with his economic reasoning, but his posts are widely read in the blogosphere and from this post answering reader questions and also the comments on posts, it's clear that the theme of buying U.S. dollars for investment is spreading. The seeds of a large renminbi devaluation have been sown in China, with the U.S. dollar seen as the most profitable way to protect against it.

Your last chance to sell Chinese real estate; China's three strategic errors

Liu Jun Luo writes that the April 2011 bounce to 3607 level for the Shanghai Composite was your last chance to escape Chinese stocks (the Shanghai Composite peaked in August 2009 and is currently at 2051). The current bounce in real estate is your last chance to escape from housing.
3067点是最后的逃命机会和房地产的最后逃命

目前，他们被美国骗了，干了3个战略性错误的事情，（一）4万亿财政扩张；（二）大量购买了欧洲债券；（三）2010年6月，让人民币继续升值。为了，弥补这些战略性错误，中国央行未来会选择牺牲股市和房地产。

Presently, they've (Chinese central bankers) been deceived by America, adopting three strategic errors, (1) the 4 trillion yuan stimulus, (2) massive buying of European debt, (3) allowing the renminbi to continue appreciating in June 2010. In order to make up for these strategic blunders, the central bank with choose to sacrifice the stock and real estate markets.

The response to China's debt problem will be large scale debt purchases and renminbi devaluation.

To wit: Is the PBoC starting to liberalise its rate regime?

Since July 2012, this has clearly changed, likely in recognition of the shift in liquidity impact of the PBC’s fx operations. The PBC is now comfortable conducting frequent reverse repo operations (grey bars on Chart 1) to quickly offset any imminent liquidity squeeze.

To which FT Alphaville replies:

In short, it’s acting increasingly like western central banks.

Although there's another idea:

Another theory for why the reverse repos have been used so far, rather than an RRR cut, is that the Party is waiting until after its congress, which is happening either in October or November, before making a major easing move.

Chinese foreign reserves to peak in 2014? What about within the next year?

This is good analysis from Nomura about changes in the Chinese economy. Where I differ is that I do not believe this will be a smooth transition.

China’s FX reserves: the coming peak

Nomura has called the top: $3.68tn at the end of 2014, up from a mere $150bn at the start of 2000. China’s reserves will then start to decline, albeit gradually, in 2015.

More than just a curious milestone, this process of peaking out will have important consequences for everything from Chinese monetary policy to US Treasury yields.

Forecasting Chinese foreign exchange reserve growth is no easy task. There are many moving parts at play in the balance of payments, the key channel for accumulating reserves. These include the current account, foreign direct investment and investment portfolio flows.

Rob Subbaraman and Zhang Zhiwei, two analysts with Nomura, have done the legwork and lay out in detail why they think China’s balance of payments will swing to deficit by 2015.

Long story short: China's domestic economy grows, FDI slows and Chinese investors go abroad. When the global economy gets growing again, this analysis will be correct, but in the meantime, events will unfold very haphazardly. Whereas they expect higher Treasury yields, I think we will see China's central bank selling Treasuries into a strong market that pushes interest rates even lower. Chinese selling will come from pressure on the renminbi, not from strength. It may be a policy of choice to depreciate the renminbi against a rapidly appreciating U.S. dollar, or it may be forced upon them by massive Chinese buying of U.S. assets.

To put an exclamation point on why I disagree with the timeline and smoothness of their forecast:


They are extrapolating existing trends. A smooth line assumes smooth sailing for the global economy.

A Chinese translation of the article: 中国外汇储备2014年将见顶

Yuan appreciation and crude oil

With Japan's failed efforts to keep the yen from appreciating, the BOJ's interest rate cut to zero having an effect measured in hours and the subsequent effect on the gold price, I thought it be worth it to take a look at the renminbi versus oil.

I have no idea whether this situation it will repeat. I used today's data for the last data point, but monthly data back to 2005. As the chart shows, it took a long time for the effects to kick in, but once the renminbi started appreciating more rapidly, oil also began a steep ascent. Using this recent data gives the appearance of an effect that does not exist, but if the race to devalue is on then it may well be that this is the start of it. Oil prices are likely to rise no matter what if nations devalue their currencies, but if there's a Chinese carry trade in oil or other commodities, there will another bubble. Also pay attention to real estate, stocks and inflation rates in China.

A condensed version is cross posted here: 人民币美元汇率和石油价格.

Yuan hegemony

The conclusion to today's 经济观察 at QQ Finance is about the internationalization of the renminbi. It finishes with the line that U.S. dollar hegemony led to America's fairy tale economy, what kinds of dreams will the internationalization of the renminbi bring?

人民币债券的海外吸引力

Of course, the yuan might go down

The deflationary scenario that has the U.S. dollar gaining a lot of ground against other currencies would put China in a position to possibly weaken the RMB. The yuan would follow the dollar higher against other currencies and the economic situation would likely be bad for exports, meaning China would be suffering from a weak global economy and a strong currency.

China could then weaken against the U.S. dollar, but it may or may not end up weaker versus other currencies, such as the euro and yen.

Below is a report from Corriente Advisors making the case for a weaker yuan.

For myself, I prefer to see what unfolds in the markets. If I have to make a choice, right now, I would pick no change in the yuan because the U.S. dollar will appreciate, but not enough to badly damage Chinese exports. However, events change daily and anything could happen. RMB appreciation is more likely as of today, but if the markets go haywire a la 2008, then RMB depreciation becomes quite possible.

Corriente has a great presentation. To summarize it in one sentence: The People's Bank of China has inflated the RMB much more than the Federal Reserve has inflated the U.S. Dollar and the greater supply of RMB versus USD will be balanced by a decline in the value of the RMB.


H/T Zero Hedge.

Internationalized yuan to take time

中国金融官员称人民币国际化不应操之过急

China should promote the internationalization of the yuan in a pragmatic fashion and at a controllable pace, foreign exchange officials said Sept. 15.

Progress may be slow in the early stages, but will accelerate once trading and settlement arrangements are in place, said Fang Xinghai, director of the Shanghai Finance Office.

The yuan will not replace the U.S. dollar as the world's primary reserve currency or enjoy similar international status as U.S economic strength will continue to grow, he said.

“现在我们要做的，就是让那些愿意用人民币进行交易的公司机构，不要受到体制的限制，为他们打通渠道。”方星海说，至于市场在多大程度上会选择人民币，这并不取决于货币当局的意志。

The untranslated part left out of the English summary says that the government will open channels for trade companies to use renminbi, and the market will decide to what extent the currency is used, not the monetary authorities.

谢国忠: 美元向好 / 美元中兴

美元向好 / 美元中兴

除了利率，从2011年起，资金也将从新兴经济体流向美国。新兴经济体资产膨胀是靠一股势头得以维持的。一旦这个势头停止，投资者将会认识到， 即使考虑到其增长潜力较高，新兴经济体的资产价格仍要远远高于美国。然后，资本流动将发生逆转，和1996年至1997年发生的情况类似。美元长期疲软曾 将资本逐向新兴经济体，并使其资本市场在很长一段时期内都充满了泡沫。大多数投机者认为，泡沫将一直持续下去，然而，当美元步入牛市，灾难也就来了。很显 然，几乎每一个新兴经济体届时都将陷入危机。如果说另一轮新兴市场危机可能会在2012年出现，我对此毫不惊讶。

The cyclical bull market for the dollar may last for two to three years. It could bounce up by 20%. The dollar index may reach 100 during the period. It would be similar to the dollar’s situation in the early 1980s. The Fed raised interest rate massively to tame inflation. Even though the US economy wasn’t that strong and the fiscal deficit was large and increasing, the dollar rose substantially until the 1985 Plaza Accord. The coming dollar bull market may even be shorter.

货币的价值是相对于其他货币而言的。美国的情况并不是独一无二的。在欧洲和日本，老龄化都是影响经济的主要因素。由于这些国家较高的家庭储蓄足 以支付其巨额财政赤字，因此，其货币相对强劲。然而，未来可能并非如此。日本的财政赤字已经达到其国内生产总值的200％。欧洲国家约为100％。只要这 些赤字还能够用国内储蓄抵补，政府就可以继续增加财政赤字，并通过保持低利率来掩藏过重的财政负担。低利率必须辅之以强势货币。但是，从长期来看，强势货 币将造成经济疲软。因此，未来其收入及储蓄都将相对较低。在未来十年中，欧洲和日本可能需要通过发行货币来撑起赤字，这将导致其货币疲软。

　　老龄化是拖累币值的主要力量。恶性通货膨胀可能会散播到世界各地。由于美元长期前景不妙，这将同时不利于其他货币。在持有货币的时候，我们必须保持警惕。但是，目前不用急于将纸币变为其他形式的资产。在许多国家，股票和资产被严重高估，尤其是中国。对于被高估的资产来说，货币仍然相对便宜。但是，当泡沫破裂的时候，不要忘了将资金转成股票和房地产

Zero Hedge wonders if there is a copper bubble

"Cornelius" offers four scenarios, which he rebuts:

1) The government is stockpiling vast amounts to store value in commodities and/or taking advantage of historic lows to build up reserves while the getting is good
2. China is an economic powerhouse (unlike us capitalist dogs), and despite being a largely export-driven economy, is putting up great production numbers in the face of the worst international collapse in 70 years and needs the copper to fuel the machine
3. Chinese scrap is getting harder to find/salvage/produce/refine, etc.
4. The SHFE and LME spread copper arb trade

Though I agree that copper prices are probably artificially elevated, two additional explanations I've mentioned are an asset backed currency or dollar hedge.

Although still viewed as a "currency manipulator" by politicians and other ignoramuses, China continues on the path of yuan reform, moving closer towards full convertibility. There are some economists who believe the yuan may be overvalued, or at least could be open to hot money outflows. The simplest of these is the argument that since there are much greater currency restrictions on outflows, it's possible that when the yuan becomes fully convertible, pent up domestic demand for foreign assets, real estate, and currency, plus foreign desire to repatriate assets, would cause a drop in the yuan. If China sold dollars to prop up the yuan, it would be putting all of the pain squarely on its exporters. If instead it uses hard assets reserve to reduce imports, it can indirectly support the yuan.

The Chinese also view themselves as the future center of global economic activity, and that will lead to the displacement of the dollar as the world's reserve currency. Copper was a major source of coinage in China from ancient times up until the modern period. If China suddenly loaded up on gold or silver, everyone would know what it was doing, but copper buying is opaque. As Cornelius writes in his rebuttal of theory one: There is also a minor quibble that if it were true, one would think China would be a little more subtle about it's buying and play the market structure a bit better - though the sheer volume hinders that to some degree. Given the size of their reserves, China cannot hide a switch between asset classes, but it can camouflage monetary policy as industrial policy. When you can't hide your actions, you hide your intentions.

Even if their goal is not a hard currency in and of itself, they may be using commodities as a hedge against dollar depreciation. W Joseph Stroupe argues that China already has amassed enough assets, hidden from official statistics, to reduce their dollar risk to 50% of assets. Backing a currency with inflated paper reserves will cause the currency itself to inflate. China anticipates higher natural resource demand; it makes sense for China to swap its currently overvalued paper for currently undervalued natural resources, if for no other reason than it is a good deal. That it also provides the option to prop up the currency or subsidize the industrial sector is a bonus.

The above speculation aside, Occam's Razor says that unless the buying becomes excessive, Cornelius is correct. When China's satisfies its need, demand will fade and copper prices will fall——assuming no economic recovery.

买铜了吗？

据安布罗斯·埃文斯-普里查德报道，中国的铜购买超过其工业需要.

负责运送商品到大陆的台湾信荣航运公司（TMT）的Nobu Su表示，北京政府醒觉西方不断印钞票是一个“黑洞”，所以正购买天然原料，可以用于长期基建发展，认为这样做是运用其1.9万亿美元储备的更好方法。他说：“下一次工业革命将由混燃汽车带动，这需要铜。”

SRB同时亦在累积铝、锌、镍和稀有金属钛、铟、铑和镨。去年商品价格下跌，中国低位购入金属储备很合理，但分析指背后另有其他原因。麦格理银行的商品专家伦农表示，中国购买金属显然是想分散美国债券和美元储备的风险。

铜有一个非常好看的图表由于这一购买。这里的iPath铜（ JJC ） ，交易所交易基金，跟踪道琼斯- 美国国际集团的指数。

中国的这个举动是很有意义的几个层次，如上面所解释。他们可以使用的金属，但它也创造了基础硬通货，这最终可能会导致人民币取代美元，欧元或日圆作为全球储备货币。

从历史上看，我国严重依赖铜的硬币，后来有银，铜系统。维基百科有一个良好的总结铜币在中华帝国。

英文翻。