Its not the Chinese Yuan but the weak US Dollar

US law makers have imposed currency bill against China last week. Is this a solution for the global economy? US policy makers are committing a serious mistake again. Currency war is not beneficial for the global economy. It might lead to protectionist policies in various economies of the world. US has called Chinese as currency manipulators, undervalued currency champions and dumping ground currency leaders on many occasions in the past. However, Chinese Yuan is not the problem but the US dollar which is hurting the confidence level of the global economy. Chinese Yuan/renminbi is undervalued by 7 per cent only not by 40 per cent as claimed by US law makers. Please read Economist magazine issue and article titled Burgonomics which clearly demonstrates the flawed arguments of the American policy makers.
Chinese yuan would be the most valuable currency in the next 4-years once the capital controls are removed. Very few people actually know this that chinese yuan has appreciated 24 per cent against the dollar from 2005-2010. Renminbi has appreciated 5.1 per cent against US dollar since 19th June 2010 and US dollar has lost 98 per cent of its value against gold since 1913. According to real estate billionaire, Sam Zell, average living standard of an American has gone down by 57 per cent in the last 25 years.
I was recently in USA and witnessed some important developments in the currency market. American investors and people globally have started opening accounts in Chinese yuan with Bank of China’s branch in New York. That shows the strength of Renminbi or Chinese yuan. Chinese government has already started trading with Russia, South Korea, Malaysia and Indonesia in their own currencies and in yuan. US dollar is losing its strength globally at a very fast pace. Are we getting back to Plaza Accord of Sept 1985? QE is a major issue in USA as it is hurting every sector of the economy. Weak dollar will not boost the export levels of USA. It is the manufacturing sector which is weak and not picking up plus the skill set of workers are not matching the jobs required in the market. Chinese Yuan is providing an alternative to the currency market while it is the weak US dollar which is hurting the global confidence level of the decision makers and investors who have taken position in US dollar.

STRATEGIC ANALYSIS OF THE
CHINESE ECONOMY

Chinese are already consuming more in terms of food and fuel items
Chinese people are spending more on luxury good, investments and real estate
Chinese is the largest auto sales market in the world right now
Chinese economy is driving the global economy otherwise we are all doomed
China is the 2nd largest consumer of the oil industry. In 1980’s, there was no oil business in China. Petro-China was set up by Goldman Sachs.
Chinese government is making strategic investment in oil with 77 deals in 27 countries from Africa to Asia to South America amounting to $147 billion deals.
Chinese investment in Malaysia and Indonesia has made oil supplies secure in the Strait of Malacca. China receives 83 per cent of her oil supplies through this route.
Chinese are investing strategically in shale gas (the new revolution in the energy market). They have taken colossal stakes in the Canadian firm Encana with investment of $4.7 billion.
I fully respect and admire the Chinese leadership for their strategic insight and prescience. Chinese leadership has shown a lot of maturity in these times of financial uncertainties. Every country has the right to protect her industry/people. It is the right of the Chinese leadership to appreciate yuan when the global economy stabilizes. Yuan has appreciated 5.1 per cent since 19th June-2010
With Chinese reserves already touching at $3.3 trillion, the Chinese yuan appreciation will remain on its course and I think will continue to surge upwards. The problem is that if the government let’s it appreciate consistently there will be tonnes of hot money so I expect them to increase 2-3 per cent then decrease 2-3 per cent in order to stave off hot money and make it not worth it for speculators. Yuan appreciation would allow the Chinese people to buy more American exports. But what American exports? Everything is already made in China. America exported its manufacturing jobs years ago. Even if China’s currency were to appreciate, production would just move to cheaper countries like Vietnam, not back to America.
According to my friend Shaun Rein who graduated from Harvard University an Expert on Chinese economy and author of the book, “The end of cheap China’’ “Unless there are structural reforms to America’s economy, a stronger renminbi will not lower the trade surplus in any meaningful way. However, net-net after a year or so expect a total of a 4-5 per cent appreciation, especially once the Christmas ordering season is done and exports are back to long-term stability. With the holiday season coming, the last thing American retailers like Wal-Mart (WMT) and Target (TGT) can afford is costlier products on their shelves. Costco (COST) is refusing to sell Coca-Cola (KO) products because Coke wants to charge too much. If customers are balking at price increases for sodas, what do you think will happen if iPhones (AAPL), Dell (DELL) computers and Mattel (MAT) toys; all made in China rise in price?’’
If you strategically analyse that if Wal-Mart were a country it would be China’s eighth-largest trading partner. Some 70 per cent of the products sold in Wal-Mart have Chinese components. Billions of dollars of purchasing power would be taken from American consumers if the renminbi/yuan were to appreciate. The holidays would not be such a merry time on Christmas Eve. With unemployment already more than 10 per cent in USA, American consumers are already stretching their shopping dollars farther than they have in a long time. The last thing they need is more expensive goods. Price increases would stop any thaw in consumer spending. Gasoline prices and food items have gone up in the US market in recent times as consumers are feeling the pinch of printing money.

STRATEGIC ANALYSIS OF THE AMERICAN ECONOMY

Household debt to GDP is 121 per cent. It would require $5-6 trillion to bring to 100 per cent level of GDP. De-leveraging or paying off debts would be a huge drag on the economy creating sub-par growth.
US consumers are not spending in USA due to lack of confidence in the economy. 75 per cent of the Americans are bearish on the economy according to Gallup survey last week up from 48 per cent polled last year on CNN
Fed is already debasing the US dollar courtesy QE. US dollar has lost 12 per cent of its value against major currencies in the last 11 months. Government action can’t boost the confidence of the American consumers. When you print or borrow money, you debase the value of your currency which tends to create inflation. The protection against inflation is gold.
US dollar is deliberately being kept weak to boost exports and support the industry.
US consumers have to save more to bolster the economy which is not happening
Most of the corporations are sitting on cash ($3.7 trillion) which is like a negative debt on the balance sheet
Quantitative easing (printing money) is a deliberate attempt to undermine the Chinese economy. If we track economic/financial history and analyse the current state, there are lots of similarities. Chinese economy was on Silver standards in 1932. US started buying silver from the open market. Silver prices appreciated and Chinese economy fell by 26 per cent in GDP. Chinese economy collapsed. China de-linked its economy from silver standards and abandoned it on November 4th 1935.
g The US should drop some export bans to China in the tech sector. For Boeing, China is 2nd largest market outside of US.
Shaun Rein MD—China Market Research Group and author of the book “The End of Cheap China’’ further adds, that the problem is not an undervalued RMB/Yuan but a weak dollar and faltering confidence which are causing volatile swings in currency markets, housing, equity, bond market, oil barrel pricing, and gold. As nations rebalance their holdings towards euros, Australian dollars, Brazilian real and Japanese yen, the dollar continues to weaken. Even retail investors are jumping on the bandwagon. This flight will not end until the dollar reverses course or, at the very least, remains stable, and it is dangerous because it means countries will be less likely to buy Treasury bills and finance America’s recovery. A weaker dollar won’t help create more exports. It will just make things more expensive for Americans. Foreign companies will produce elsewhere, because it is still cheaper to produce in low-cost labor markets like Vietnam. Rather than wasting time pushing China to strengthen the yuan, President Obama and his economic team should focus and figure out how to strengthen the dollar by paying down Chinese debts. A strong dollar, not a strong yuan, is what’s important for America’s future. The big question for some economists is that whether to predict that stagflation is already creating havoc for the US economy or US economy is entering into balance sheet recession. Stagflation, a period in which consumer prices rise while the economy contracts, differs from what other economist who see the US headed for what’s known as a balance sheet recession, where the economy tanks but prices don’t soar and is largely a time when businesses and individuals pay off debts.

FEW SOLUTIONS FOR
AMERICAN POLICY MAKERS

The only way President Barack Obama and his economic team can solve the US economic woes is to adopt “common-sense’’ Reaganomics, the policy. Reaganomics would fix any economy that’s in the doldrums. It’s not a magic sauce, it’s pure common sense. How Obama can do it…Follow these 5 simple steps adopted during Reagan era in 1980’s
1. US have got to get rid of all federal taxes in the extreme and replace them with a low-rate flat tax on business net sales, and on personal unadjusted gross income.
2. US must have to have spending restraint. Government spending causes unemployment, it does not cure unemployment. Government spending has never raised the GDP. Its the tax cut that enhances the GDP growth. Empirically proven.
3. US need sound money in the financial market to bring back confidence among investors. Helicopter Fed Chairman Ben Bernanke is running the least sound monetary policy I’ve ever heard of. Markets don’t like uncertainty and chaotic moves. US has increased it money supply by 138.6 per cent from from $851 billion in Sept-2008 to 2.03 trillion by 2010. Fed Chairman Ben Bernanke’s effort in curing the economy is fruitless. Quantitative easing is like giving poison to the economy. You can make out from the money growth from the above chart. US dollar demise is continuing unabated. Analyse the chart with dollar traveling to its dangerous downward spiral. This financial bazooka is hurting the US dollar more than Chinese yuan and adding poison to the economy in the shape of inflation. Price inflation can be reduced through monetary deflation. This was advocated by Late Nobel Laureate Milton Friedman from University of Chicago, in his book Money Mischief-Episode in Monetary History.
4. US need regulations, but they don’t need those regulations to go beyond the purpose at hand and create collateral damage. The regulatory policies are really way off at the moment.
5. Lastly, US need free trade. Tariff /quotas would be devastating for the US economy. Foreigners produce some things better than Americans do and US produce some things better than foreigners. It would be foolish in the extreme if USA didn’t sell them those things US produce better than they do in exchange for those things they produce better than US do. I think that USA can win its top rating back, but only when economic policies are completely turned around. However, President Barack Obama’s administration’s only economic plan seems to be expanding government ownership by means of production. Is this socialist in nature? Getting a strategic game plan in order is the key to bring investors and confidence back to the US economy. Global economy needs a stable dollar. Happy investing in the currency market.

Shan Saeed is a financial economist and commodity expert. He has 12 years of financial market experience. Graduated from University of Chicago, Booth School of Business, USA & IBA Karachi. Attended Islamic Banking group discussions at Harvard Business School. Can be reached at [email protected]
Blogs at www.economistshan.blogspot.com