What on God’s green earth is China trying to do with its currency? Charlie Morris called me this morning on his way to the country to discuss it. He’s making the yuan the subject of his second monthly edition of the Fleet Street Letter. He’s also doing weekly email updates.
I know this because I just got one on oil, which will go out later this week. In it Charlie writes the following about oil: “Materially lower prices, if they occur at all, are unlikely to last. Looking ahead, the world needs far higher prices in order to sustain production”. He then makes an investment recommendation based on rebounding oil prices.
But back to China and the yuan. Figuring out what the Chinese are doing, whether it’s working, and its effect on stock, commodity, bond, and currency markets is beyond the scope of a mere daily email. It’s what newsletters were invented for. There is, presumably, an investment advantage to be gained by thinking about it and then taking action.
China, though, has warned infamous currency speculator George Soros from targeting the yuan. China’s People’s Daily ran the following headline, according to news reports: “Soros’s war on the renminbi and the Hong Kong dollar cannot possibly succeed — about this there can be no doubt”. That official response came after Soros told Bloomberg TV last week that he was long on US Treasuries and short or negative on Asian currencies and commodity linked investments.
Market forces vs. ERM
It all reprises the attack Soros and other speculators made on the British pound in September 1992. The Bank of England kept the pound at an artificially high level to keep it in the Exchange Rate Mechanism (ERM) set up by the European Union. That was meant to harmonise the relative currency levels in Europe as a part of ever closer economic and political union.
The speculators, quite rightly, concluded that inflation was too high in the UK and interest rates too low. The pound was overvalued and the Bank of England fought a losing battle to support the pound in the ERM. Market forcers won out. Soros won a fortune. And the pound was withdrawn from the ERM and adjusted.
By pegging the yuan to the dollar, the Chinese financial authorities have declared their own war with market forces. They can support the currency and bleed foreign exchange reserves. Or they can devalue. Every decision has consequences. Stay tuned for more on this from Charlie. And don’t you worry about George Soros. He’ll be just fine.
Category: Central Banks