Joe Studwell reflects on his experience in China:
In my brief involvement with China, I have so far experienced three prognosis phases: “China Takes Over the World I (1992-1997)”, “Oh My God, It’s a Disaster I (1998-2002)” and “China Takes Over the World II (2003-2008).” There are now strong indications that we are entering “Oh My God, It’s a Disaster II (2009-?).”
What is driving the latest ‘Oh My God’ phase? When looking at China, many see asset prices, non-performing loans and the fixed exchange rate as fuel for calamity.
The rational behind the concerns over asset prices and non-performing loans are pretty obvious, but what is it about the exchange rate that worries people? There are two concerns: 1) an artificially-low exchange rate that is connected to loose US monetary policy is inflationary; and 2) if the currency is revalued, the wealth affect of a more valuable Yuan could lead to a bubble.
F.E.E.R. makes an interesting additional observation on potential yuan revaluation:
A corollary of this school of thought is that China’s public finances will take an enormous hit by virtue of the country’s $2.5 trillion in foreign-exchange assets, most of which are in U.S. dollar holdings, because these will be revalued downwards in yuan terms. This would constitute a kind of giant back-tax payment for years of “currency manipulation.”
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