Hi Jeff,
Another China fear about crashing the bond markets from Barrons editorial:
An exceedingly smart pal of ours with a cosmic take on life, liberty and the pursuit of money confided to us last week his conviction (as is ours) that the greatest threat to the markets -- and, for that matter, our economic equilibrium -- is China, and not whether the Fed is eager to sit on rates patiently for a considerable period. And specifically, if and when China revalues its currency.
Yes, he's well aware that the U.S. has been nudging and cajoling, leaving no stick or carrot behind in a concerted effort to get the Chinese to up the value of their currency, which presumably would yield all manner of goodies, especially to farmers, rust-belt industries and other traditional exporters. But he worries that this is one of those legendary cases of be-careful-of-what-you-wish-for.
For his view is that, contrary to the conventional wisdom, if and when China unpegs, as he delicately but concisely articulates it, "all hell will break loose in the markets." Along with abundant smarts, both of the real-world and Street variety, our pal, we should add, is one cool cat, with an abiding aversion to alarmist hyperbole.
Stephanie Pomboy, in her latest "MacroMavens" commentary, reports that the talk in the Chinese press is that the revaluation will take the form of a currency basket. The beauty of such a move for the Chinese, Stephanie explains, is that it would "deflect the qualms about dollar weakness feeding their competitive advantage without really derailing their competitive position with any of their major trading partners."
The most immediate effect of China's depegging from the dollar, Stephanie believes, is that the vast, bustling and still inscrutable nation no longer would have to convert its foreign-trade revenues back into dollars. Which, so claims our smart pal, is one of the unintended and conceivably unpleasant consequences of the all-court press we've been exerting to get the Chinese to revalue. Unintended and unpleasant because it would mean the gradual disappearance of a powerful buyer of our securities.
Indeed, according to Stephanie, the process may already have begun. She cites the sharp reduction in the portion of China's foreign-currency reserves that it's recycling into Treasuries -- from 54% in 2002, to 40% in the first half of last year and 24% in the final six months of '03 -- as persuasive indication that China's shift to a currency basket may already be under way.
Stephanie, incidentally, agrees that long term, a change in China's currency peg will ring "the death-knell for bonds," but, she suspects, not right away.
petere |
