Global Investing

Yuan risks uniting bulls and bears?

March 12, 2012

Is the outlook for China’s yuan uniting the biggest global markets bulls and bears? Well, kind of.

As China posts its biggest trade deficit (yes, that’s a deficit) of the new millennium and its monetary authorities flag greater “flexibility” of the yuan exchange rate (the PBOC engineered the US$/yuan’s second biggest daily drop on record on Monday), the chances of an internationally-controversial weakening of yuan in a U.S. election year have risen.  A weaker yuan would clearly up the ante in the global currency war, coming as it does amid Japan’s successful weakening of its yen this year and as Brazil on Monday felt emboldened enough in its battle to counter G7 devaluations by extending a tax curbing foreign inflows.  And, arguably, it could bring the whole conflagration around full circle, where currency weakening in the BRICs and other emerging economies blunts one of the desired effects of money-printing and super-lax monetary policy in the G7 — merely encouraging even more printing and so on.

Societe Generale’s long-time global markets bear Albert Edwards argued as much last week:  “We have long stated that if the Chinese economy looks to be hard landing, as we believe it will, the authorities there will actively consider renminbi devaluation, despite the political consequences of such action.”

But, unusually, BRIC-inventor and long-time global economy bull Jim O’Neill, in an FT op-ed this weekend, is not that far away from this yuan call either — even if he’s keener to stress the likelihood of a more volatile yuan rather than the risk of a weaker one per se and, unlike Edwards’ typically gloomy wider take, reckons it’s a benign development related to China’s healthy rebalancing of its economy away from export dependency to more domestic consumption

…currency reform does not equal currency appreciation. The renminbi is going to become more volatile like other currencies. It will go up as well as down against the dollar, partly because China’s current account surpluses are coming to an end, but also because it is opening up its capital account.

So if not a meeting of minds on the bigger picture, then at least something approaching harmony on the risks to anyone betting on an endlessly rising yuan  –  especially those in Washington.

 

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