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Strategies & Market Trends : 2026 TeoTwawKi ... 2032 Darkest Interregnum -- Ignore unavailable to you. Want to Upgrade?

To: Hawkmoon who wrote (70257)	1/9/2011 1:58:01 PM
From: elmatador	Read Replies (1) \| Respond to of 219977

In just a week the RMB has given back 17 per cent of its rise since June, when Beijing loosened controls. It is now just 2.9 per cent stronger than in the summer and going in the wrong direction China currency puzzle irks emerging markets By James Mackintosh Published: January 8 2011 01:27 \| Last updated: January 8 2011 01:27 China is not making life easy for anyone. In just a week the renminbi has given back 17 per cent of its rise since June, when Beijing loosened controls. It is now just 2.9 per cent stronger than in the summer and going in the wrong direction. A weakening Chinese currency is one of the few things that could unite Republicans and Democrats in Washington. It is also sure to worry those faced with the increasingly difficult task of managing other emerging economies, for whom China is the main competitor. Emerging markets are struggling with soaring food prices – at record highs this week – and the resulting inflation. At the same time, they are trying to stop enormous inflows of hot money from developed markets. The dilemma is well known, but it has left politicians and central bankers facing an impossible choice. Either they can keep their currencies stable by running low interest rates, deterring hot money, or they can control inflation by raising interest rates, slowing their economies. Unfortunately, the appropriate policies for a stable currency and for low inflation are directly contradictory – and require vastly different approaches from investors. Attempts are being made to try to escape this catch-22, controlling inflation without hitting exporters with a stronger currency. None are likely to work for long. Brazil and Chile demonstrated two of these alternatives this week. Chile went down the well-worn route of currency intervention, sterilised through local bond issues, to try to limit peso strength. Brazil was more devious, hitting its local banks with new rules restricting their ability to short the dollar. Both had an immediate impact, weakening their currencies. Yet neither is likely to stop hot money for long, as there is too much swilling around. For example, investments in emerging market equity mutual funds hit $3.4bn in the first week of the year, according to EPFR Global – double last year’s weekly average. Investors can see what policymakers see: interest rates are too low, and when they rise currencies will rise with them, bagging foreigners a profit. The chart shows just how low real rates, adjusted for inflation, are. Only Brazil and South Africa among major emerging economies have significant real rates; many are negative. China, even after its Christmas day rate rise, still has a real rate of just 0.46 per cent, its lowest since June 2008. There is no reason to expect emerging markets to accept sharply higher rates, and stronger currencies, any time soon. Many seem to be keeping their fingers crossed that high food prices will prove temporary, allowing inflation to fall back without big rate hikes. In the meantime, they are using alternative policies to try to slow their economies and foreign capital flows, with the occasional small rate rise. One, Turkey, has even taken a punt on cutting rates, hoping that lower inflows of foreign cash will slow its booming economy. As Jerome Booth at fund manager Ashmore points out, emerging market policymakers must realise their approach is not sustainable. But none wants to be the first to take a hit by letting their currency rise a lot – giving other emerging markets a chance to take export market share. China holds the solution. If the renminbi was allowed to strengthen, other emerging countries would be likely to follow, easing inflation pressures, enriching impoverished populations, easing global imbalances and helping troubled western exporters. There could be a surprise agreement to rebalance currencies at the Group of 20 this spring, although the failure of its November summit does not augur well. Some hope China could be persuaded to open its capital account to developing country central banks, diversifying their reserves away from the dollar and so easing the way to a co-ordinated strengthening of emerging market currencies. But neither looks probable. The most likely outcome in the short term is the worst for investors: more capital controls, slow currency appreciation, inappropriately low interest rates and more asset price bubbles. Inflation is unpredictable, with much of the food price rise due to bad harvests; but there are many signs that core inflation is rising in the emerging world, too. The policy dilemma will eventually trump these factors, unless policymaker errors – or a new western crisis – derail emerging economies’ growth. Investors must decide whether the dilemma’s resolution will be a focus on controlling inflation or on stabilising currencies. The former means short-term local currency bonds or cash are the best bet, while the latter should lead to rising inflation and benefit emerging equities. Whichever they choose, emerging market investors need to keep both eyes on China’s policymakers.