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Should We Have Trusted the Chinese to Let the Yuan Appreciate?

Posted by Larry Doyle on October 8, 2010 8:58 AM |

To what degree can international trading partners trust each other in the face of an ongoing decline in overall aggregate global demand for goods and services? 

More specifically, to what degree can the two major economic superpowers, those being the United States and China, trust each other in the midst of major economic challenges. While everybody can smile for the camera at trade conferences and international economic summits, what happens when those officials go home and implement policy? As with most things in life, we are wise to watch what is done to a far greater extent than what is said. Why do I raise this topic now?

Let’s look in the rear view mirror to mid-June at which point in time our wizards in Washington celebrated as the Chinese announced that they would agree to let their currency, the yuan, appreciate in value.

As RMG Wealth Management highlighted on June 22nd, Chinese Revaluation! What Now For Markets?

The Peoples Bank of China announced over the weekend that they are relaxing the peg between the Remnimbi and the Dollar. An analyst from UBS is quoted in this morning’s FT…”Broadly speaking, the change in policy should help bolster risk sentiment across asset markets – at least in the near term – insofar as markets take comfort from the PBoC’s positive outlook for Chinese and global macro-financial conditions, as well as the potential for improved relations between the U.S. and Chinese Governments”

Well, as we fast forward to today, I am compelled to ask the following: 

1. What happened to the positive outlook for global macro-financial conditions?

2. Do we really believe the Chinese intended to change their policy? 

3. Improved relations between the United States and Chinese governments? Really?

As currency wars, battles over trade, and protectionist pressures gain momentum, and I think back to the Chinese announcement to let their yuan appreciate, I can only think of one great movie scene and that is none other than, 

D-Day : Hey, quit your blubberin’. When I get through with this baby you won’t even recognize it.
Otter : Flounder, you can’t spend your whole life worrying about your mistakes! You fucked up – you trusted us! Hey, make the best of it! Maybe we can help.
Flounder : [crying] That’s easy for you to say! What am I going to tell Fred?
Otter : I’ll tell you what. We’ll tell Fred you were doing a great job taking care of his car, but you parked it out back last night and in the morning, it was gone. We report it to the police, D-Day takes care of the wreck, the insurance company buys your brother a new car.
Flounder : Will that work?
Otter : Hey, it’s gotta work better than the truth.
Bluto : [thrusting six-pack into Flounder’s hands] My advice to you is to start drinking heavily.
Otter : Better listen to him, Flounder, he’s in pre-med.
D-Day : [firing up blow-torch] There you go now, just leave everything to me.

Did we trust the Chinese to truly follow through on allowing the yuan to appreciate? Should we have? Did we screw up and trust them? 

An individual with experience in international trade in general and with China specifically has told me there is no real trust between the Chinese and United States. That reality seems readily more apparent in light of the Chinese announcement in June and their posture currently.

Larry Doyle     

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I have no affiliation or business interest with any entity referenced in this commentary. As President of Greenwich Investment Management, an SEC regulated privately held registered investment adviser, I am merely a proponent of real transparency within our markets so that investor confidence and investor protection can be achieved.

  • Dan

    Spot on topic, we got taken to the hoop by the Chinese.

    Her eis an interesting article this morning, BRIC’s Oppsoe US on Currency Controls,
    http://www.bloomberg.com/news/2010-10-08/brics-unite-to-oppose-u-s-drive-to-weaken-currency-controls-russia-says.html

    “U.S. Treasury Secretary Timothy F. Geithner said this week that large economies undervaluing their currencies may accelerate inflation, create asset bubbles and restrict growth. China is the biggest target for criticism after limiting the yuan’s rise to about 2 percent against the dollar since a June pledge to make the currency more flexible.”

    Egg on their face in Washington? Getting beaten like a drum?

  • Lou

    Eerily reminiscent of the 1930s protectionist measures employed by so many nations. Recall that the crash of ’29 was followed by an ongoing decline in the early 30s, a big rebound in the market in the mid 30s and then another major selloff in the late 30s.

    http://stockcharts.com/charts/historical/djia19201940.html

  • Sean

    The U.S. should never have granted China with “Most Favored Nation” trading status back in 2000 unless & until China allowed a full free-floating of its currency. Of course to now demand China have a fully free-floating currency or to remove “Most Favored Nation” trading status would be certain immediate economic suicide for both China and the U.S.

    Also, to do nothing now but allow the current status quo to continue will also be certain economic suicide, it will be soon but it will not be immediate, and so it is certain that this is what will continue to happen until the economic suicide occurs. Goodbeye cruel world…..

    George Soros recently came-out in the FT indicating that the current global currency system will collapse unless China allows the appreciation of its currency; problem is if China does this then China will collapse. If China’s going-down, it certainly won’t do-so in order to save the rest of the global economy and currency system. If China’s going-down, it’s going to take the rest of the global economy and currency system with it.

    Got gold??






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