Asia/Pacific: All Children of Greenspan
Andy Xie (Hong Kong)
“If they intervene, we will throw so much money at them that they will drown,” one hedge fund manager in Singapore responded curtly when I mentioned the possibility of Japan intervening in the currency market.
I wish people would drown me in money!
“Just listen to the politicians - the US wants a weaker dollar,” another hedge fund manager enthused.
Birth of a Massive Hedge Fund Industry
Mr. Greenspan has given birth to a massive hedge fund industry, which will make policymaking more difficult in the short term and could lay the foundation for a global financial crisis eventually. After the technology bubble burst, instead of curbing the excesses, Mr. Greenspan cut interest rates aggressively to stop the pain. The painkiller turned out to be a stimulatory drug, pumping up a property bubble. The great American binge continued.
The large US trade deficit pumped a massive amount of dollars into the global economy, depressing interest rates and inflating properties around the world. In particular, overseas Chinese took the game to China in pursuit of higher returns than that offered by US Treasuries, creating a big property bubble in China.
A Bicycle Economy
The US-China axis created by Chairman Greenspan and overseas Chinese has produced a “bicycle” economy for the world. US consumption and China’s investment are the wheels with Mr. Greenspan the heroic peddler. Because the US economy is seven times China’s in value, China has to spin multiple times as fast as the US to keep the world going.
As I travel around the world, I see Greenspan’s children everywhere. The big-box retailers in America, the outsourcing companies in Guangdong, the property developers in Shanghai, the resource companies in Australia, the hedge funds in London, and the stockbrokers in Hong Kong. Greenspan’s children are working hard to keep the global economy in an upbeat state.
Weak Dollar Policy
Mr. Greenspan is now trying a weak dollar policy to prolong the binge in America. His children are trying hard to comply. The dollar’s value drops when Mr. Greenspan mutters that foreigners may become less willing to fund the US twin deficits.
The weak dollar policy will end up in disaster, in my opinion. I think it is essentially an attempt to redistribute economic growth from Europe, Japan and emerging markets to the United States. We are predicting 1.8% GDP growth for Europe and 0.5% for Japan in 2005. The pie is so small that a weak dollar is more likely to lead to higher inflation in the US than more growth.
ChinaIs the Focus
To keep the global economy going during a weak-dollar environment, someone has to create a big bubble, just as Japan did in the 1980s. China has been singled out as a potential candidate. Greenspan’s children are rubbing their hands with excitement. Commodities, Asian stock markets, emerging market currencies and credits should all go through the roof, if only China plays the game.
The key signal that China has agreed to play, of course, would be a big revaluation of the renminbi, just as the Japanese yen was revalued in the 1980s. When the market talks about 3% or 5% revaluation, it is just baiting China. When China moves a little, everyone will jump on China and ask for more.
China already has a big bubble. It is extremely unlikely that it could create a bigger one. In the 1980s, Japan had already become a high-income industrial economy. China is still a low-income developing economy with many internal imbalances. Its unsophisticated financial system could not maintain internal balance for long during a big bubble.
I do not think China will play the game, destroying itself to sustain indulgence elsewhere. China is too poor to become another Japan. Instead, the renminbi peg to the dollar could become the anchor for global stability when American politicians play with fire, in my view.
The Importance of the Peg
The role of the renminbi peg to the dollar will be even more important than in 1998. A weak dollar could easily turn into a dollar crash, which would possibly trigger a global financial crisis. There are huge amounts of dollars held offshore, mostly by ethnic Chinese, the government agencies of Japan and oil exporters. If the renminbi peg to the dollar is removed, the demand for dollars from ethnic Chinese would probably collapse, which would be the most likely trigger for a dollar crash.
I think the renminbi peg is the pillar that would prevent dollar weakness from turning into a dollar crash. By holding onto the peg, China would underwrite global financial stability. I believe China should increase interest rates to deflate its investment bubble and remove the speculation that surrounds its economy. This approach would allow the global economy to adjust in an orderly fashion. History will be the best judge of China’s policies.
The end-game for the global economy would be a bursting of the consumption bubble in America, in my view. As American politicians relentlessly push for a weaker dollar, US inflation will pick up, which would force Mr. Greenspan to increase rates more quickly than he would otherwise. Mr. Greenspan’s policies may have to dispose of the offspring that they have spawned in the past few years.
I can already hear the cries, “Dad, please keep the game going.”
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