You are here
Banker says China still needs to protect yuan against hedge funds
Yuan Only One Factor in Rates
By Kathleen Pender
San Francisco Chronicle
Sunday, July 24, 2005
http://www.SFGate.com/cgi-bin/article.cgi?
file=/chronicle/archive/2005/07/24/BUGVBDSILT1.DTL&type=business
Will China's move to loosen its currency's link to the dollar be the
pin that pricks the U.S. bond bubble -- and perhaps the housing
bubble along with it?
That depends on whether you think China's announcement on Thursday
that it would no longer maintain a fixed exchange rate between its
currency -- called the yuan, or renminbi -- and the dollar was a
symbolic gesture or the start of something big.
On Thursday, the markets were convinced China was taking a big first
step toward a free-floating currency, which would require it to buy
fewer U.S. Treasuries. That would probably lead to higher U.S.
interest rates. In anticipation of such a trend, the yield on the 10-
year Treasury bond leaped 0. 12 percentage point to 4.28 percent.
On Friday, investor sentiment shifted. Rather than a major shift in
policy, traders decided the revaluation was probably a political
move designed to head off protectionist sentiment in Congress and
make Chinese President Hu Jintao's visit to Washington in September
more pleasant. The yield on the 10- year Treasury bond lost half of
Thursday's climb, falling to 4.22 percent.
The reality: Chinese intervention in the currency markets is only
one of many factors that affect U.S. interest rates. In isolation,
China's decision probably would lead to higher rates. How high would
depend on how quickly it moves toward a free-floating currency and
whether other Asian countries let their currencies appreciate along
with the yuan.
"The Chinese are going to tie the yuan a little bit less to the
dollar," says Jim Grant, editor of Grant's Interest Rate
Observer. "They will be acquiring fewer dollars with which to
manipulate or control their exchange rates. They will be investing
less in U.S. Treasuries. All things being the same, and they never
are, this could be a bad thing for U.S. bond prices and could tend
to push interest rates higher."
China had maintained the dollar peg for 11 years. To do so, it had
to buy or sell U.S. Treasury securities to offset changes in market
supply and demand.
In recent years, America's growing appetite for cheap Chinese-made
goods created a huge demand for yuan. To prevent the yuan from
rising against the dollar, China bought large amounts of U.S.
Treasury securities.
At the end of May, Chinese investors (including the government and
private entities) owned $234 billion in U.S. Treasuries, up from
$165.8 billion in May 2004 and a measly $81.3 million in May 2002.
China's Treasury purchases have helped keep a lid on U.S. interest
rates. Low rates have encouraged Americans to borrow money to buy
even more Chinese electronics, appliances, textiles and other goods.
If the yuan had been freely floating, this trade imbalance would
have raised the value of the yuan relative to the dollar. That would
have made Chinese imports more expensive and cooled Americans' ardor
for them.
Pegging its currency to the dollar gave China an advantage over
Asian countries that have more freely floating currencies.
The growing U.S. trade deficit with Japan, for example, has caused
the yen to appreciate against the dollar (although that changed
course this year).
Although Japan does not maintain a fixed exchange rate, it has been
buying Treasuries to compete against the Chinese and hold down the
value of the yen.
In May, Japanese investors held $685.7 billion in U.S. Treasuries,
more than 2.5 times as much as China, which is the second-largest
foreign holder of Treasuries.
"Japan is China's big competitor. Now that the Chinese have revalued
the yuan, it gives the Japanese some breathing room," says Jim
Bianco, president of Bianco research. Japan's Treasury
purchases "won't go to zero, but the growth rate will go down."
Other Asian countries are likely to follow suit. After China's
announcement, Malaysia said it, too, would no longer peg its
currency, the ringgit, to the U.S. dollar. If every Asian country
slows its Treasury purchases by a little, the effect could begin to
add up.
Bianco says China gave out too little information to predict exactly
how its move will affect the dollar and U.S. interest rates.
In a statement laced with oxymora, the People's Bank of China said
it hopes to improve "the socialist market economic system" in China
by moving toward a "managed floating exchange rate regime."
It will tie the yuan to an undisclosed basket of currencies. Each
day it will announce the closing price of the yuan against various
currencies, including the dollar.
It set the starting rate for the U.S. currency at 8.11 yuan per
dollar, 2. 1 percent higher than its previous, long-standing rate.
That's a small move, considering some U.S. manufacturers say the
yuan is undervalued by 30 to 40 percent.
Each day, the dollar can float 0.3 percentage points higher or lower
than the previous day's closing price. However, it appears that at
the end of the day, the Chinese central bank can set the closing
price wherever it wants, says Andrew Foster, director of research
with Matthews International Capital Management.
"It's like keeping a bird on a string. The bird can fly wherever it
wants on the string. The person holding the string can walk wherever
he wants. You may walk to where the bird landed and start from there
or walk somewhere else," says Foster.
"By keeping the basket of currencies a mystery, they have the
flexibility to outline a central parity rate that may not be where
the market put it the previous day," he says.
Foster called China's move "an irreversible step forward toward the
eventual convertibility of the currency. Having a truly market-
driven exchange rate is some time off. But the train has left the
station."
Others see it as politically motivated. To protect U.S.
manufacturers against inexpensive imports, certain members of
Congress wanted to slap stiff tariffs on Chinese goods unless
Beijing let the yuan rise.
"It was much more of political move," says Jim Cusser, a fixed-
income manager with Waddell & Reed. "All the politicians were
patting themselves on the back, acting like this was the Berlin Wall
coming down. It's just not so. It's such an extremely small move."
No matter what happens with the yuan, Cusser says, foreign buyers
will continue to scoop up Treasuries because they are generally
safer and higher yielding than other countries' debt.
Ten-year U.S. Treasuries are yielding about one percentage point
more than comparable bonds from France, Germany, Spain and Holland,
and about three percentage points more than Japanese debt, he says.
And at a time when other central banks are cutting rates, the
Federal Reserve plans to take rates higher.
"We have the most transparent markets in the world," Cusser
says. "If I had extra savings and I was a global investor, it's hard
to pass up the depth and breadth of the U.S. markets."
Mark Kiesel, an executive vice president with Pimco, says China and
Japan have little incentive to let their currencies rise because it
would hurt their export sectors.
One reason China might want a more flexible exchange rate policy is
to be able to fight inflation if it becomes a problem in its roaring
economy. Chinese output grew at a 9.5 percent rate in the first half
of this year. But, so far, inflation has been low in China, thanks
to strong productivity growth.
Even if China and Japan did let their currencies rise, U.S. interest
rates would not necessarily rise because our economy is still soft,
Kiesel says. And if the Fed continues raising short-term rates, it
will further weaken the economy.
He says Americans have become so mired in debt that even a small
rise in long-term rates could slow the economy dramatically.
"Consumers are getting much more fragile in terms of their ability
to spend," he says.
"If China revalued (its currency) and U.S. inflation was picking up
and the economy was booming, we would have a different view," Kiesel
says.
Edmund Harriss, manager of the Guinness Atkinson China and Hong Kong
fund, was in Shanghai last week. He says the yuan move was bigger
news in the United States than it was in China.
"I belive this is a precursor to further currency moves," he says,
but China will be reluctant to move quickly, in part because Chinese
companies don't have the hedging instruments that companies in more-
developed countries have to protect themselves from currency swings.
"Within two years, I would expect to see the yuan about 10 percent
higher, " Harriss says. "But it's not a clear path on how fast it's
going to get there.
----------------------------------------------------
To subscribe to GATA's dispatches, send an e-mail to:
gata-subscribe@yahoogroups.com
To unsubscribe, send an e-mail to:
gata-unsubscribe@yahoogroups.com
----------------------------------------------------
RECOMMENDED INTERNET SITES
FOR DAILY MONITORING OF GOLD
AND PRECIOUS METALS
NEWS AND ANALYSIS
Free sites:
http://www.cbs.marketwatch.com
http://www.usagold.com/amk/usagoldmarketupdate.html
http://www.capitalupdates.com/
http://www.silver-investor.com
http://www.thebulliondesk.com/
http://www.goldismoney.info/index.html
http://www.minersmanual.com/minernews.html
http://www.a1-guide-to-gold-investments.com/euro-vs-dollar.html
http://www.investmentrarities.com
http://www.kereport.com
(Korelin Business Report -- audio)
http://www.plata.com.mx/plata/home.htm
(In Spanish)
http://www.plata.com.mx/plata/plata/english.htm
(In English)
http://www.resourceinvestor.com
http://www.goldpennystocks.com/
Subscription sites:
http://www.lemetropolecafe.com/
http://www.interventionalanalysis.com
http://www.investmentindicators.com/
Eagle Ranch discussion site:
http://os2eagle.net/checksum.htm
Ted Butler silver commentary archive:
http://www.investmentrarities.com/
----------------------------------------------------
COIN AND PRECIOUS METALS DEALERS
WHO HAVE SUPPORTED GATA
AND BEEN RECOMMENDED
BY OUR MEMBERS
Blanchard & Co. Inc.
909 Poydras St., Suite 1900
New Orleans, Louisiana 70112
888-413-4653
http://www.blanchardonline.com
Centennial Precious Metals
3033 East First Ave., Suite 807
Denver, Colorado 80206
1-800-869-5115
http://www.USAGOLD.com
Michael Kosares, Proprietor
cpm@usagold.com
Colorado Gold
222 South 5th St.
Montrose, Colorado 81401
http://www.ColoradoGold.com
Don Stott, Proprietor
1-888-786-8822
Gold@gwe.net
El Dorado Discount Gold
Box 11296
Glendale, Arizona 85316
http://www.eldoradogold.net
Harvey Gordin, President
Office: 623-434-3322
Mobile: 602-228-8203
harvey@eldoradogold.net
Gold & Silver Investments Ltd.
Mespil House
37 Adelaide Rd
Dublin 2
Ireland
+353 1 2315260/6
Fax: +353 1 2315202
http://www.goldinvestments.org
info@gold.ie
Investment Rarities Inc.
7850 Metro Parkway
Minneapolis, Minnesota 55425
http://www.gloomdoom.com
Greg Westgaard, Sales Manager
1-800-328-1860, Ext. 8889
gwestgaard@investmentrarities.com
Kitco
178 West Service Road
Champlain, N.Y. 12919
Toll Free:1-877-775-4826
Fax: 518-298-3457
and
620 Cathcart, Suite 900
Montreal, Quebec H3B 1M1
Canada
Toll-free:1-800-363-7053
Fax: 514-875-6484
http://www.kitco.com
Lee Certified Coins
P.O. Box 1045
454 Daniel Webster Highway
Merrimack, New Hampshire 03054
http://www.certifiedcoins.com
Ed Lee, Proprietor
1-800-835-6000
leecoins@aol.com
Lone Star Silver Exchange
1702 S. Highway 121
Suite 607-111
Lewisville, Texas 75067
214-632-8869
http://www.discountsilverclub.com
Miles Franklin Ltd.
3015 Ottawa Ave. South
St. Louis Park, Minn. 55416
1-800-822-8080 / 952-929-1129
fax: 952-925-0143
http://www.milesfranklin.com
Contacts: David Schectman,
Andy Schectman, and Bob Sichel
Missouri Coin Co.
11742 Manchester Road
St. Louis, MO 63131-4614
info@mocoin.com
314-965-9797
1-800-280-9797
http://www.mocoin.com
Resource Consultants Inc.
6139 South Rural Road
Suite 103
Tempe, Arizona 85283-2929
Pat Gorman, Proprietor
1-800-494-4149, 480-820-5877
Metalguys@aol.com
Swiss America Trading Corp.
15018 North Tatum Blvd.
Phoenix, Arizona 85032
http://www.swissamerica.com
Dr. Fred I. Goldstein, Senior Broker
1-800-BUY-COIN
FiGoldstein@swissamerica.com
The Moneychanger
Box 178
Westpoint, Tennessee 38486
http://www.the-moneychanger.com
Franklin Sanders
1-888-218-9226, 931-766-6066
----------------------------------------------------
HOW TO HELP GATA
If you benefit from GATA's dispatches, please
consider making a financial contribution to
GATA. We welcome contributions as follows.
By check:
Gold Anti-Trust Action Committee Inc.
c/o Chris Powell, Secretary/Treasurer
7 Villa Louisa Road
Manchester, CT 06043-7541
USA
By credit card (MasterCard, Visa, and
Discover) over the Internet:
http://www.gata.org/creditcard.html
By GoldMoney:
http://www.GoldMoney.com
Gold Anti-Trust Action Committee Inc.
Holding number 50-08-58-L
Donors of $1,000 or more will, upon request,
be sent a print of Alain Despert's colorful
painting symbolizing our cause, titled GATA.
Donors of $200 or more will receive copies
of "The ABCs of Gold Investing" by Michael
Kosares, proprietor of Centennial Precious
Metals in Denver, Colorado, and "The Coming
Collapse of the Dollar" by James Turk and
John Rubino.
GATA is a civil rights and educational
organization under the U.S. Internal Revenue
Code and contributions to it are tax-deductible
in the United States.
