Chinese Float

Quote from ShoeshineBoy:

Also, that article states "Like many Chinese, Li has been studying what happened to the Japanese bubble economy, and he worries that an appreciating Chinese currency could make the bubble here worse. The sharp rise in the Japanese yen during the 1980s pushed real estate and stock prices to unrealistic levels, he notes. "

I'm not sure if I understand why a strong Yen would inflate real estate and stock prices?
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Not necessarily a stupid question - I question the logic of that statement too.

If I'm not mistaken, that article has confused cause and effect.

Were people buying into Japan because the Yen was strong, or was the Yen strong because people were buying into Japan?

What happens to your currency when you have a massive trade imbalance in your favor and you are making profits hand over fist selling goods to the world? It gets stronger, because everyone is buying what you are selling, which increases your foreign currency reserves and thus bids up your own currency.

Ergo, the Yen did not drive real estate and stock prices in the '80s, but rather a global perception of Japanese economic supremacy (remember when their management techniques were golden and they were going to buy New York?) fueled a Japanese bubble, which in turn fueled the already strong Yen as Japan's profit prospects were extrapolated to infinity. All well and good until the virtuous circle turned vicious.

The reason China should be concerned about a strong currency on the float is not because it would make the bubble worse, but because the stronger your currency gets, the more expensive your exports get, which in turn brings the danger of stalling out your export based economy. If the renminbi gets too strong vs the USD, American buying slows and then there's big trouble.
 
Quote from Babak:

Because people would rush in to buy the currency (through purchases of real estate, stocks, etc.) and participate in an anticipated continuation of the appreciation.
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One last point on this subject: the currency does play a role in the boom, but it comes through the actions of central bankers when they try to avoid the strong currency scenario.

To prevent the currency from rising too much -i.e. to keep the good times rolling for exporters- the central bank will keep the home currency down by diluting it via purchase of US dollar denominated assets (as asian countries are doing now).

The resultant purchases create excess liquidity in the home market because cb's have to expand the base money supply to fund their activities, thus indirectly fueling a speculative boom.

So, in one sense, a strong currency can and does lead to the bidding up of stock and property markets - but only if the central bank is creating excess liquidity by default in an effort to manage said currency's strength (and fails to mop up w/ new debt issuance).

Funny how money obeys the laws of physics... and now I really must hang it up for a while. later dudes
 
Quote from darkhorse:

Not necessarily a stupid question - I question the logic of that statement too.

If I'm not mistaken, that article has confused cause and effect.

Were people buying into Japan because the Yen was strong, or was the Yen strong because people were buying into Japan?

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Good point. Really I don't see how you can't separate the two. But one could argue that part of what inflated the U.S. dollar was the global perception that we were the safest place to park your investment. This perception alone would inflate almost any asset to potentially "unrealistic" levels. But I agree that you can't even get to that perception unless everyone is "buying what you are selling."
 
Quote from darkhorse:

One last point on this subject: the currency does play a role in the boom, but it comes through the actions of central bankers when they try to avoid the strong currency scenario.

To prevent the currency from rising too much -i.e. to keep the good times rolling for exporters- the central bank will keep the home currency down by diluting it via purchase of US dollar denominated assets (as asian countries are doing now).

The resultant purchases create excess liquidity in the home market because cb's have to expand the base money supply to fund their activities, thus indirectly fueling a speculative boom.

So, in one sense, a strong currency can and does lead to the bidding up of stock and property markets - but only if the central bank is creating excess liquidity by default in an effort to manage said currency's strength (and fails to mop up w/ new debt issuance).

Funny how money obeys the laws of physics... and now I really must hang it up for a while. later dudes
More...

Interesting idea, but then what was going on in the 80's? I remember when Japanese corporations were buying up large chunks of American real estate and market share? Are you saying this was fueled by their cb increasing the money supply?
 
Mukul Munish
28 April 2004 / 01:22 AM

Revaluing the yuan against the US dollar is one of the limited options the central government may turn to in an attempt to cool its raging economy, according to former British prime minister John Major.

Giving the closing keynote address at the 13th Annual Asia Leadership Forum yesterday, he told a gathering of chief executives and other business bosses that Beijing will have to make its choice soon.

``There are limited options to cooling the economy and revaluing the currency [is one of them],'' Major said.

China has repeatedly rebuffed suggestions from the US and international agencies that the yuan is undervalued and should be allowed to float.

This gives undue advantage to mainland exports, which are much cheaper than those from competing countries. The yuan is pegged to the US dollar and moves in a very narrow band.

Major said rising commodity prices and inflation would prompt the Chinese authorities to revalue the currency.

``[Revaluation] may be an easier option for China than cutting investment flow to an investment-hungry economy.''

He expected a swift action on the currency front because Chinese regulators were aware of the fast overheating economy and its consequences on the investment climate.

On a positive note, Major said the yuan could become the base Asian currency in the next decade, with a number of regional currencies pegged to it.

``Presently, there are two major international currencies, the US dollar and the euro, maybe Asia will have to look at its own base currency and the yuan could be it.''

He lauded the emergence of the mainland economy over the past decade.

``The economic event of our times is the rise of Asia - first the emergence of Japan and now recently China.''

Major warned that the gap between the rich and the poor was widening, and to wage war on terrorism successfully, rich nations would first have to help poorer countries tackle poverty.

He said in the next 25 years the world's population would increase from six billion to eight billion and almost 97 per cent of the increase would be in the poorer nations.

http://www.thestandard.com.hk/news_detail_frame.cfm?articleid=47120&intcatid=1
 
Quote from ShoeshineBoy:

Interesting idea, but then what was going on in the 80's? I remember when Japanese corporations were buying up large chunks of American real estate and market share? Are you saying this was fueled by their cb increasing the money supply?
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Yes- excess liquidity at home fuels reckless bank lending, the money doesn't have to stay at home...
 
Quote from darkhorse:

Yes- excess liquidity at home fuels reckless bank lending, the money doesn't have to stay at home...
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Hopefully this isn't getting tiresome for you. But if the db increased the money supply significantly, why didn't they Japan get inflation? Or did they in terms of real estate and stocks (which is what the Japanese, who are big savers, put their money into)?
 
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