Tuesday, May 11, 2010

The Chinese Yuan is Overvalued

No the title is not a misprint. It's my opinion. An opinion that is based on history, fact, and common sense.

I want you to step away from the media and government propaganda and ignore all the economists that didn't predict the financial crisis of 2008. I want you to step back and try to take a non-biased view on this hot topic issue of China's currency, the yuan or the RMB.

Economists and speculators think they're debating this topic, but they aren't debating, they are just agreeing with each other, and arguing about what the outcome may be. Everything you hear in the news today tells you that the Chinese yuan (RMB) is undervalued. The only questions that the media seems to ask is how much is the currency undervalued by and when will it move. I say hold your horses. Economists are making one huge assumption sound like fact. They're all saying the yuan is definitely undervalued and ignoring all opinions from the other side. It's like betting on the Lakers to win the next NBA playoff game with your friend, and debating where to eat to celebrate the team's victory. Listen folks, the game hasn't finished, so don't get too excited.

Why is it that we all believe that the yuan is undervalued? Oh, is it because of the large trade imbalances, unfair global competitive advantage, currency manipulating, economic mumbo-jumbo. I forgot about that. Or did I? From what I see, China might be in the midst of a massive economic bubble. A country whose economy is heavily reliant on global exports, has an abundance of debt and huge inventory over supply. Don't forgot China is still considered a developing nation with a GDP per capita about 10% the size of the US.

So, lets take a look from outside of China's “Wonderland” and compare some actual facts.

BS#1: If the yuan appreciated, the US trade deficit would decline.

Fact: When China allowed the yuan to appreciate from June 2005 to July 2008, the US's trade deficits with China actually GREW. It went from -$202 billion in 2005 to -$268 billion in 2008. So, where is this yuan Up, US trade deficit DOWN BS coming from?? Just look at the facts.

2005 - 2008

Yuan UP 17.9%

US Trade Deficit UP 32.7%

BS#2: All other emerging market currencies are appreciating against the US dollar, so the yuan should rise as well.

Fact: Most economists would like to compare the yuan with other emerging market currencies, like the Brazilian real and the South Korean won. If that is the case, then it would be reasonable to make a past comparison of the moves in emerging market currencies with the moves in the yuan. I'm now going to focus on the Brazilian real to give an example.

From 2005 to 2008, both the Real and the Yuan appreciated against the US dollar. Then in July of 2008, the Chinese government pegged the yuan to 6.8RMB/US$. Now, if we look at a chart of the Real after July 2008 we will see something quite interesting.

From July to December 2008, the Real DROPPED 37.5%! While, the Yuan did NOT move. It wasn't only the Real that dropped, but almost all currencies in the world did as well. From the Aussie dollar, Euro, to the Norwegian krone, they all fell against the US dollar in 2008. Some say that the move was just temporary, but it was a significant move nonetheless. And remember the yuan did not drop like everything else. On the contrary, due to the yuan being pegged to the US dollar, the yuan was actually appreciating with the US dollar against all the other currencies.

So, why doesn't anyone think that China was actually trying to prevent their currency from crashing like all other currencies in 2008? Or that maybe China just wanted stability in the yuan during the major financial crisis that occurred. Nooo...instead everyone sides with Mr Timmy Geithner and calls China a “Currency Manipulator”.

Right now, the Euro is crashing against all the major currencies. Due to the yuan's peg with the US dollar, the yuan is soaring against the Euro. What happens if in 2010 we get a sequel to 2008's US dollar “Iron Man” performance? And if the yuan doesn't appreciated, but just does not de-peg against the dollar, what would happen? The yuan would soar with Iron Man (US dollar) against most global currencies. Then will China be able to handle the rapid ride up? Or could they just devalue like the rest??

Think about it.

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