We have to remember that A Chinese Yuan upward revaluation would raise a whole array of prices and potentially give more pricing power to companies in myriad industries.
Bill Gross made an interesting point in January of this year in his January Investment outlook when he said.
"It is PIMCO’s opinion that central bank purchases in 2004 were the primary force in lowering 10-year Treasury rates from 4.90% to nearly 4.0% in October, while the Fed was in the process of raising short rates by 125 basis points. We could see a run back up towards those levels if foreign buying tapers off, even while the Fed stays low as pointed out in #1 above.
www.pimco.com
this is another portion of his January report discussing Yuan revaluation...........
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China Revalues
Admittedly our most problematic money making theme, if only because of its timing, is our belief that 2005 is the year when China/Asia revalue their currencies upward. Actually, the decision is entirely in China’s hands, but evolving events should force at least a semblance of a resolution. China will be more inclined to revalue if internal inflation accelerates (currently not the case), their banking system stabilizes, and/or tariff pressures from the U.S. threaten to kill the golden goose of free trade. Perhaps just as important, China’s gradual evolvement from WTO inductee to potential kingmaker at future G8 economic policy discussions argues for some type of symbolic move that speaks to cooperation in a global context.
Should a meaningful (more than 5%) revaluation occur against the dollar or even a basket of diversified currencies, the event would signify a further extension of U.S. reflation via an upward repricing of U.S. labor and wage rates that accompany a falling dollar. Bond bearish? Yes, in several ways. First of all from the obvious effect on U.S. inflation – perhaps as much as ½% over the next several years depending on the extent of the Chinese reval. Secondly, from the prospective sale (or reduced buying) of U.S. Treasury and corporate bonds in anticipation of the revaluation. Such gingerliness may simply reflect the cautionary sales by the PIMCOs of the world in anticipation of the knock-on effects of future inflation. But additionally, the astronomically high levels of bond purchases by surplus generating economies (Japan primarily, China secondarily) may begin to come down as shown in Chart I. |
