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Who Benefits From Yuan Revaluation?

Last updated 3/8/2010 5:29 AM ET (GMT -5) 14 Comments

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Boris Schlossberg

Director of Currency Research, GFT

Top Stories

• PBOC Zhou - yuan peg may end but no indication of when
• Sarkozy expresses strong support Greece
• Asia up strongly +2% but Europe flat
• Oil at $83/bbl as risk flows remain
• Gold at $1135/oz.

Overnight Eco

• JPY Bank Lending -1.5% vs. -1.5%
• JPY Current Account 1.71T vs. 1.25T
• JPY M2 Money Stock 2.7% vs. 2.8%
• JPY Economy Watchers Sentiment 42.1 vs. 40.2
• NZD Manufacturing Sales 0.7% vs. -5.1% last
• CHF Unemployment Rate 4.1% as expected
• CHF Retail Sales 4.4% vs. 2.4%
• EUR Sentix Investor Confidence better at -7.5 vs. -8.0 eyed
• EUR German Industrial Production n/a

Event Risk on Tap

• CAD Housing Starts expected at 186K

Price Action

• USD/JPY back to 90.25 as yuan reval and muted risk appetite help yen
• AUD/USD at 91.25 as high yield continues to drive trading
• GBP/USD oscillates just underneath 1.5200
• EUR/USD better policy support spurs rally to 1.3700

The euro rallied steadily towards the 1.3700 level in the wake of the strong support for Greece expressed by French President Nicholas Sarkozy over the weekend and a raft of fresh proposals by European policy makers to create new pan-European institutions to better deal with the fiscal financing problems facing the region. Amongst some of the ideas being floated by member states are; the creation of European version of the IMF, a pan European debt agency that and a ratings agency that would manage debt on a regional rather than national basis.

As we noted earlier, “By proposing the creation of pan-European institutions to better unify the region’s fiscal and monetary policies EZ policymakers are making serious efforts to address the market’s concern over the sovereign debt problems within the region.” Still, while we believe that some of the short term pressure on the  EUR/USD may have been alleviated, the unit remains vulnerable to further selling by skeptical shorts especially if economic data does not show any improvement exacerbating the fiscal deficit gap dynamics that have plagued the euro  this year. For the time being however, pair appears to have stabilized at 1.3400-1.3600 region and may mount a counter trend rally this week.

Meanwhile in Asia Pacific, PBOC Governor Zhou made a momentary splash by stating that yuan peg to the dollar was an "an unusual method adopted during an unusual time," but made no concrete statements as to when China may revalue its currency.  Monetary officials in Beijing are clearly becoming concerned about the massive real estate bubble forming in key urbane centers of the country. In Shanghai for example the price of a 2 bedroom apartment has skyrocket to $200,000 against per capita income of $5,000.  However, officials are concerned that a one off yuan revaluation would endanger Chinese growth by making export sector less competitive on the global market.

Some analysts have suggested that the Chinese may go to a basket of currencies  approach which could be a intelligent compromise for the near term as officials grapple with the dueling problems of economic growth and asset inflation.  If the yuan does strengthen, then the yen could become the primary beneficiary of this policy move, because Japan is both the largest trader and the largest competitor of China. Japanese corporate holdings of Chinese assets would appreciate in any yuan revaluation scenario while Japanese products could become more competitive against their Chinese counter parts.

One possible victim of any yuan revaluation which will be seen as a de-facto tightening by the market is Australia. Any deceleration in Chinese growth would likely have the greatest impact on the Aussie which has been largely dependent on Chinese demand  for the past several years. Nevertheless, the AUD/USD continued to perform well in overnight trade, as markets shrugged off the revaluation comments and focused on the unit’s G-20 leading 4% yield.  This Wednesday’s Australian employment numbers could set the tone for the Aussie in the near term if like last month they produce another upside surprise.    

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Comments (14)

hsbc

March 08, 2010 at 09:22 AM ET

usd200,000 for a chinese apartment. this is a bit low. its more like cny3mio for a 108 sq m place and all taxes including that of the seller is borne by the buyer.

alexjbrandt

March 08, 2010 at 09:35 AM ET

I live in a 1,500 sq ft house (3 bed, 2 bath) that bought for $250k, I'd never pay $200,000 for a 2 bed apartment. ,thats outrageous. Especially when theres such a huge gap between the rich and poor in china. And $200k for a 2 bed apartment is considered a bit low eh? I'd hate to see what the Chinese economy does when that housing bubble burst! It'd pale in comparison to the US housing bubble burst.

alexjbrandt

March 08, 2010 at 09:52 AM ET

3 million Chinese yuan = 439,362.18 U.S. dollars.
108 meters*3 feet = 325 feet


Have to pay almost half a million dollars for a 325 sq ft apartment?

hsbc

March 08, 2010 at 09:49 AM ET

the problem is that most chinese are so bullish on properties that they dont think a crash is possible. also most would not lose their job as china is growing healthily. unless a great recession comes along, it doesnt look like its coming off any time soon.

alexjbrandt

March 08, 2010 at 09:57 AM ET

sounds like they could be in for a rude awakening. I think that China will have a bump in the road in the next 10 years. Either inflation or a housing market crash will get em.

hsbc

March 08, 2010 at 09:55 AM ET

yes. and cny3mio is not all u pay. u need to foot the tax for the seller as well. all in you would need to add another cny400,000 on top of the cny3mio. so all in u are looking at cny3.4mio for a 108 sq metre 2 bedroom apartment in shanghai.

alexjbrandt

March 08, 2010 at 10:01 AM ET

What kind of income as Chinese citizen would you need to actually afford that? Probably a lot higher then a per capita income of $5,000. Does china have that many rich people to actually afford places like that? Or are they just sitting empty?

hsbc

March 08, 2010 at 10:07 AM ET

its a mix of investment and hoarding. u have property speculators who buy something like 10 apartments at one shot. and u hv parents who buy properties for their son who is about to be married. as for income, the low income that u see might not be their actual income as there are grey and tax free income. those who bought previously had only to pay a small downpayment.

i think the crucial problem is that there is no external investment and no real investment tool. bank deposits are below inflation rate and u are not allowed to invest overseas.

hsbc

March 08, 2010 at 10:07 AM ET

its a mix of investment and hoarding. u have property speculators who buy something like 10 apartments at one shot. and u hv parents who buy properties for their son who is about to be married. as for income, the low income that u see might not be their actual income as there are grey and tax free income. those who bought previously had only to pay a small downpayment.

i think the crucial problem is that there is no external investment and no real investment tool. bank deposits are below inflation rate and u are not allowed to invest overseas.

FXDragon

March 08, 2010 at 04:18 PM ET

How do they track people if theyre investing overseas. You can send it to your relatives for support:)
Anyhow whats the inflation and central bank rate in China?

hsbc

March 08, 2010 at 07:18 PM ET

locals are only allowed a limited amount to be sent abroad. i think at the moment it is cny500,000 and all foreign exchange must be done at commercial banks who would register the transaction with the authorities. reported inflation is 1.5% but this does not include housing. as for the central bank rate u can check the pboc rates on their website or on bloomberg. eg 6mth deposit rates are 1.98% and there is a little bit of tax

FXDragon

March 09, 2010 at 01:22 AM ET

Do they have all the global banks over there? Citibank, HSBC, Fortis, ING...? Or do they just have their own big ones.
So you say there are no investment banks i guess right? Nor private or investment section of global banks if they exist.
It seems theyre fueling a bubble. Citizens probably dont know much about stocks. Speculate on a bowl of rice:)
Long live the free market i say!

Thanks,

hsbc

March 08, 2010 at 09:58 AM ET

yes. and cny3mio is not all u pay. u need to foot the tax for the seller as well. all in you would need to add another cny400,000 on top of the cny3mio. so all in u are looking at cny3.4mio for a 108 sq metre 2 bedroom apartment in shanghai.

hsbc

March 08, 2010 at 10:01 AM ET

what amazes me is that on average a chinese has 2 to 3 apartments and most still think that chinese apartments are low in price when compared to london. incredible isnt it?

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About The Author

Boris Schlossberg began his Wall Street trading career more than 20 years ago at Drexel Burhnam Lambert. There, he traded nearly every type of financial product on the market in the U.S., from equities and options to stock index futures and foreign exchange. His innate ability to analyze market information and use it to trade has helped him become an industry-recognized, “go to” trading professional.

These days, whenever the markets move, many organizations turn to Schlossberg for his take on the situation. He is a weekly contributor to CNBC's Squawk Box and a regular commentator for Bloomberg radio and television. His daily currency research is widely quoted by Reuters, Dow Jones and Agence France Presse newswires and appears in numerous newspapers worldwide. Schlossberg has written for publications like SFO magazine, Active Trader and Technical Analysis of Stocks and Commodities. He is also the author of Technical Analysis of the Currency Market and the co-author of Millionaire Traders: How Everyday People Are Beating Wall Street at Its Own Game with Kathy Lien. He joined GFT in 2008.