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Strategies & Market Trends : Booms, Busts, and Recoveries -- Ignore unavailable to you. Want to Upgrade?

To: TobagoJack who wrote (37449)	8/25/2003 11:12:09 AM
From: Haim R. Branisteanu	Read Replies (1) \| Respond to of 74559

The Renminbi-Dollar Peg Keeps US Bond Yields Low - The massive reallocation of capital to China from the rest of the world should continue and may accelerate. If China sustains its FDI over the next ten years -- a conservative assumption -- China would receive US$500 billion in foreign direct investment. Further, the total assets that the residents of Hong Kong and Taiwan hold probably exceeds two trillion dollars. About 10% of this pool of capital is now in China. The ratio could rise to 30% in a decade, in my view. Part of this capital reallocation would go through foreign direct investment. A significant chunk would go through other channels for asset accumulation inside China. China may receive US$700 billion in capital inflow over the next ten years, and it would be able to purchase foreign securities above its trade balance by this amount. This would turn China into a bigger force than Japan in the US bond market. The rising role of China in the US bond market should change the incentives of US policymakers. If China were to appreciate its currency, it would reduce capital flow into China, which would decrease China's demand for US bonds. Thus, China's currency peg to the dollar becomes vital for keeping US bond yields low, I believe. Low Bond Yields Keep the US Housing Market Strong The US is building a record number of houses. It has averaged 1.67 million units per annum this year, the highest since 1987 and up 53% from the bottom in 1991. The median housing price has also moved convincingly above the trend of per capita income in the past two years. It now stands at 3.3 times per capita income, 22% above the average in the 1990s. It represents US$2.7 trillion in home value for US households. The increase in house prices has been vital to the US economy since the NASDAQ collapsed in 2000. Property prices have increased by 25% since the spring of 2000, massively outperforming the 5.3% increase in per capita income during the same period. The difference between the performance of property prices and per capita income has generated US$2.1 trillion in paper wealth for US households. The increase in US home values has been about twice as much as the GDP increase since the spring of 2000. If the property sector had not been so buoyant, the US economy could not have escaped a severe recession after its IT bubble collapsed, in my opinion. The appreciation of stocks and properties in the past quarter has helped to push net household wealth in the US to within 5% of its all-time high in the spring of 2000. Rising paper wealth is the reason why the US economy is so strong at present, in my view. One could argue that the US economy shifted from the IT bubble to a property bubble to avoid a downturn. I have been advocating this view for the past three years. It sustains a global equilibrium that depends on US demand and Asian savings. If the US property bubble bursts, it would push the US into a severe downturn, though it would force the global economy to address the imbalance between East Asia and the US, which offers benefit in the long term. The short-term pain, however, would be severe, in my view. If China were to appreciate its currency, it could trigger just such a scenario, in my view. One could argue that it is what the world needs. But it would be very bad for the US economy in the short term. The US policymakers are pushing China to appreciate its currency, expecting short-term benefits from the boost for its manufacturing sector. However, the impact on its housing market could push the US into a massive recession, exactly the opposite of what I believe the US policymakers want to achieve. morganstanley.com