Silicon Investor (SI) -- The First Internet Community

STOCKTALK

We've detected that you're using an ad content blocking browser plug-in or feature. Ads provide a critical source of revenue to the continued operation of Silicon Investor. We ask that you disable ad blocking while on Silicon Investor in the best interests of our community. If you are not using an ad blocker but are still receiving this message, make sure your browser's tracking protection is set to the 'standard' level.

Strategies & Market Trends : John Pitera's Market Laboratory -- Ignore unavailable to you. Want to Upgrade?

To: John Pitera who wrote (7167)	7/20/2005 5:37:08 PM
From: John Pitera	Respond to of 33421

Friedman-- on US & China and The Yuan Upward Revaluation July 20, 2005 Joined at the Hip By THOMAS L. FRIEDMAN On the question of whether China's Cnooc oil company should be permitted by the U.S. government to purchase the U.S. oil and gas company Unocal, my view is very simple: let the market rule. Oil is fungible. It is all one global market. And if China wants to overpay for a second-tier U.S. energy company, that's China's business. Anyway, the more starved Americans are for oil, the sooner we will adopt alternatives and get off this drug once and for all. If I seem uninterested in this matter, I am. Because I do not think the important issue is who owns Unocal. The important issue is whether America and China are drifting into a dangerous confrontation over geoeconomics. How so? Well, in brief, the Chinese and U.S. economies have become totally intertwined. While we have been focused on 9/11 and Iraq, China and America have become, in economic terms, Siamese twins. You know that cheap mortgage you just got? Well, who do you think subsidized it? In many ways it was China. Americans don't save anymore, and import more than they export. Normally, a nation that did that as long and lavishly as the U.S. has would have to raise interest rates to get other countries to hold its currency. But America has not had to do that, in part because China has been willing to hold most of the dollars it has been accumulating - gained from all the goods it is selling America - despite the low interest paid on those dollars and the fact that they have been depreciating against other major currencies. How come? Call it the Tiananmen-Texas Bargain. After Tiananmen, China's leaders struck an implicit bargain with their people, argued Steven Weber, director of Berkeley's Institute of International Studies. "The bargain is that China's voters give up the right to vote, and the Chinese government guarantees China's middle class 9 percent annual economic growth. China's political stability today depends on that bargain." The Texas side of that bargain came from the Bush team. For a long time, it ignored China's undervalued currency so China could sell us lots of cheap stuff and would continue holding our devaluing dollars and helping to keep U.S. interest rates low. Our buying binge helped keep China's workers employed and its leaders in power. Their holding our depreciating dollars helped you buy a house with no money down. We've been in symbiotic relationships like this before with Western Europe and Japan during the cold war, but they were allies and democracies, so we could adjust imbalances more easily. Not so with China. We are Siamese twins, but most unlikely ones - joined at the hip, but not identical. That's a problem. Because we now need to adjust the Tiananmen-Texas bargain. So many U.S. dollars and jobs are flowing to China, it is becoming politically and economically unsustainable for the Bush team. Hedge funds have made huge speculative bets around the T-T bargain. We need China to revalue its currency upward against the dollar, so China buys more stuff from us and we buy less stuff from China. But China's foreign exchange reserves today are nearly $750 billion and heading for $1 trillion - most in U.S. Treasury notes. If China is compelled by the U.S. to revalue its currency, and effectively devalue the dollar further, Beijing will take a big hit on all of its dollar reserves - especially since most experts say the dollar has to be devalued by 30 to 40 percent against the Chinese currency to have any impact on the trade balance. That would also be likely to affect the dollar's value against other currencies and create pressure for inflation and higher interest rates in the U.S. "If the dollar falls and U.S. interest rates rise, it could cause a recession or stagflation in America," Professor Weber said. "But if the Chinese currency rises too far too fast and triggers unemployment, it could cause a revolution against the Communist Party. ... We might see our dollar policy as a market adjustment, but they could see it as an attempt at regime change." As I said, the issue is not Unocal. The real issue is that we have slipped into a symbiotic relationship with another major power that is neither a free market nor a democracy. We have both grown dependent on that relationship - the U.S. for cheap goods and cheap mortgages, and China for high employment and regime stability. We now have to adjust the bargain at the heart of that relationship. Whether we can do that delicately, without destabilizing Beijing or the global economy, could be the big geopolitical story of 2005.

To: John Pitera who wrote (7167)	7/22/2005 6:52:23 PM
From: John Pitera	Read Replies (1) \| Respond to of 33421

Revaluing the Yuan -- A Long Road to Revaluation Sources: WSJ.com research, China's National Bureau of Statistics, U.S. Census Bureau, International Monetary Fund (IMF) Jan. 1, 1994: China devalues yuan by 33% against U.S. dollar and begins using a "controlled floating rate system." Special currency for foreigners and international trade, called Foreign Exchange Certificates, are removed from circulation. China pledges goal of eventual full currency convertibility. January 1995: U.S. Treasury says China is no longer a currency manipulator, reversing a years-long stand. July 2, 1997: Thailand devalues the baht, sending regional currencies into free-fall, sparking the Asian financial crisis. September: U.S. Treasury Secretary Robert Rubin suggests yuan undervalued, saying, "it'd make more sense" for China to buy U.S. goods rather than accumulate foreign-exchange reserves, then at $130 billion. January 1998: Premier Zhu Rongji (left) pledges yuan will remain stable on eve of meeting U.S. Deputy Secretary of Treasury Lawrence Summers. U.S. official travels to region to shore up confidence in currencies, including yuan. May: Strongman Indonesian President Suharto resigns after mounting public protests, ultimately stemming from country's currency crisis. June: U.S. Treasury Secretary Robert Rubin praises China as one of world's "sources of stability" for resisting pressure to devalue. Dec. 11, 2001: China enters World Trade Organization. Terms include no references to exchange-rate system. 2002: U.S. records bilateral annual trade deficit exceeding $100 billion with China for first time. January 2003: Inflation data mark end of five-year bout with falling prices in China, including outright deflation in 2002. May: China balance of payments data for 2002 first time ever show "hot money" inflows rather than capital flight. July: U.S. Federal Reserve Board Chairman Alan Greenspan (right) implies Chinese exchange rate should be adjusted up, saying fixed rate will breed inflation and is "something they'll have to address." September: U.S. convinces G-7 Finance Ministers to issue statement calling for "more flexibility in exchange rates ... based on market mechanisms," a barb directed at China. U.S. Treasury begins "intensive engagement" with China to push for yuan flexibility. October: Congressional appointed U.S.-China Economic and Security Review Commission says yuan 15% to 40% undervalued. October: People's Bank of China raises official interest rates for first time in nine years to stem fast-gaining inflation. March 2005: Premier Wen Jiabao (left) says objective of yuan reform is to create "market-based, managed and floating-exchange rate." Adds, yuan reform could "come around unexpectedly." National People's Congress endorses Mr. Wen's call for crackdown on excessive investment and switch to "appropriately tight fiscal policy." April 29: China yuan trades outside of usual exchange rate band for nearly 20 minutes. May: U.S. Treasury Secretary John Snow warns China could be relabeled currency manipulator if no flexibility emerges before November. May: System launched in Shanghai allows Chinese banks to trade in world currencies at international exchange rates, although yuan not included. June: U.S. Senators Lindsey Graham and Charles Schumer shelve effort to slap 27.5% tariff on imported Chinese goods, citing reassurance from Messrs. Greenspan and Snow China will soon adjust exchange rate. July 21: China announces that it has revalued the yuan by 2.1% to 8.11 per dollar, and abandons greenback peg in favor of a basket of currencies. Malaysia abandons its peg of the ringgit to the dollar in favor of a managed float.