CNY rise to supplant the USD positive for US and global economies

Chinese RMB, Renminbi, Chinese Yuan

China currency is all the rage in the news today: Inflation, rmb convertibility, President Hu’s musings on the matter.  It all boils down to a few things.(for now) One, despite the positive announcement, it’s important to realize that the Chinese government is not letting the currency float.  The recent allowing of trade settled in renminbi and the new found ability of Chinese domestic companies to acquire foreign firms or assets using renminbi is mainly a move to allow state owned enterprises greater freedom to purchase relatively cheap assets overseas.  The moves do not make it easier for foreign firms to operate in China, import capital or export profits.

Chinese firms that wish to purchase overseas assets will need to get government approval to do so. Naturally, firms owned by the Chinese government will have an easier time in getting those approvals than private firms.  2010 was the year of the rising state owned enterprises in practically every industry.  And especially in the Chinese real estate market.  State owned developers gobbled up prime land at an increasing rate and further solidified their position in the market as the prices rose higher and higher.  Thus crowding out firms without sufficient access to capital. (private firms mainly)  Although hard numbers are hard to come by, its estimated that about 80% of land purchases in 2010 were by state owned developers and financed by state owned banks.

Lost in the shuffle of news is the very bright spot of the rising Chinese yuan.  In our opinion, this is a winning thing for both China and the international community.  The current strength of the Chinese economy has a been a very stabilizing force during this economic downturn.  Efficient Equity believes that allowing the yuan to be convertible (even if mainly only for state owned enterprises for the moment) allowing the yuan to appreciate and the steadiness with with the Chinese government is moving all add to increasing trust in the markets.  Certainly a good thing for all.  We applaud Mr. Hu for this move and hope that foreign firms and pools of capital will soon be able to freely invest and export profits in this increasingly international market.

I have observed some  sensationalist headlines of late:  Much to the effect that China’s currency rise is somehow a threat to the dollar and thus the US economy.   We feel that not only is this untrue as the strength of Chinese economy has a symbiotic effect on other economies but also that it weakens Western countries ability to stand firm against currency manipulation.  The real enemy of global economic balances.  By making a boogie-man out of the rise of the Chinese currency, the foreign press undercuts Western credibility on important issues.  Over hyping of President Hu’s comments about the US dollar denominated system being a thing of the past gravely mislead the public.  For one, I don’t think there is a “US dollar denominated system” in the first place.   Investors are free to use which ever currency they choose in settling payments.  Also they are free to invest in any economy they wish.  The current weakness of the Euro and global instability since 08′ were the causes of the flight to safety for many investors.  Safety is usually seen to be found in the largest currency of the moment.  In this case, the US dollar.  No one entity or government has much say on how accounts are settled.  Certainly there are issues that need to be addressed but in no way is the strength of any one economy a “threat” to any other.  The whole monetary system benefits when new currencies appreciate and global trade and global GDP rises.   Simply more money to go around. We are very happy see the unfolding of events and only hope they increase and the Chinese economy stays on a safe and steady path.

-Paul Salo Jan. 17th, 2010