Posted on 06/08/2005 1:18:28 PM PDT by Brilliant
A butterfly could flap its wings in China and trigger a chain of complex events that spawns a trailer park-trashing tornado in Texas, according to proponents of the complex branch of mathematics called chaos theory. Should a group of senior officials at China's central bank flap their own bureaucratic wings and revalue the national currency, most U.S. economists say we're safe from the fallout — unless, of course, it falls out in a way no one expects.
Among Wall Street economists, the consensus is that few U.S. companies that buy goods from China would be seriously affected if that country revalued its national currency, known formally as the renminbi and also as the yuan, now firmly pegged at 8.28 to the U.S. dollar. But in what Merrill Lynch economist David Rosenberg says is a "classic example of the law of unintended consequences," more significant effects could come from a rise in U.S. interest rates, which could hit the bond market and then the housing sector. And housing, he points out, is providing "the last vestige of stimulus in this economy."
By keeping the value of the yuan artificially low, Treasury Secretary John Snow and other critics of the current rate say that China has piled up trade surpluses because it can flood U.S. and European markets with cheap goods. That's become a political football to be kicked around after any mention of the U.S.'s staggering $162 billion trade deficit with China, though few observers believe a yuan revaluation will help close the gap.
"It's convenient to point to one distortion in the market as the source of those ills when the reality is that there are multiple causes for the U.S. trade imbalance," says CIBC economist Avery Shenfeld.
Still, a partial revaluation seems increasingly likely because of Chinese domestic pressures, mainly a need to slow the rate of growth in its rapidly expanding economy. Some published reports speculate that the yuan could rise 5% within the next three months, though Zhou Xiaochuan, China's central bank governor, was vehemently denying such a move late last month. Rumors that a revaluation would accompany a planned expansion of the country's national foreign-exchange trading system on May 18 sparked the denial.
So what does this mean for U.S. companies and consumers? Opinions vary, but the general consensus is that some sectors, particularly retail and apparel stocks, might see some short-term volatility if the yuan moves, but that it won't change their fundamentals. Tim Craighead, an economist at Goldman Sachs, says a 5% or less revaluation won't mean a lot from a global perspective. But in a May 2 note he adds that, "if it is 5%-10% and if it precipitates a lifting of Asian currencies more broadly and if it happens sooner rather than later, then the intrigue builds."
In the measured language of his profession, Craighead says the sky won't fall, but keep an eye out anyway. "There are many valid caveats to simplistically drawing stock-specific conclusions," he says. "But a revaluation would nonetheless be an important fundamental consideration for stock investors when it happens."
Over time, shoppers might see marginally higher prices at Wal-Mart Stores (NYSE:WMT - News) or Target (NYSE:TGT - News), or any of the thousands of retailers that stock all those Chinese-produced goods that help create the trade deficit. That is, unless those stores start buying their goods in other countries that can provide very cheap labor, such as Bangladesh or Vietnam. CIBC's Shenfeld says only about $1 of the cost of a $3.99 t-shirt at Wal-Mart comes from its manufacture in China — transportation, marketing and, of course, profit margins account for the rest of the markup.
What American investors and shoppers won't see are new jobs for U.S. companies. The sectors where many manufacturing jobs went overseas — toys, appliances, electronics and apparel — migrated because foreign labor is cheap, and domestic labor isn't. We won't see a sudden domestic resurgence if China becomes a fractionally more expensive place to do business, cautions Merrill's Rosenberg. "Consider for a moment that the U.S. employs just over 1.5 million people in the sectors where we import most from China," he wrote. "And let's not forget. U.S.-China wage differentials being what they are, the trend towards outsourcing to China is not going to go away."
The downside to an appreciation of the Chinese currency would be a regional currency boost, making U.S. trade with Asia a more expensive proposition. Craighead echoes a widely held opinion when he says U.S. interest rates and inflation "would likely tick up."
That would put the brakes on the low-interest-rate-fueled growth in the U.S. economy, which Robert Brusca, president of Fact and Opinion Research, says has played out principally through reckless spending from refinanced real estate. "I'm convinced that people have taken this money and blown it on gewgaws and junk," he says. "We're basically borrowing money to support our consumption, and we are living well beyond our means."
If interest rates keep rising, that flow of cheap money dries up, and so does the real-estate market. Rosenberg points out that there area about nine million construction and real-estate jobs — six times more than the sectors that have lost market share to China. "For every 1% loss of employment in the construction and real-estate sector due to the prospect of higher interest rates... we would have to create 12% more jobs in the apparel/textile industry just as an offset (the income tradeoff is even larger)."
If and when the Chinese currency butterfly takes its first flaps, Rosenberg has one piece of advice for politicos who point to the yuan as the bane of our trade balance: "Be careful what you wish for."
I have a yen for some dough........
But a correction in real estate will come in any case. The interest only mortgage, like the six year car loan, is a sign of an industry that is staving off a crash because household disposible income cannot keep up.
I agree that the r.e. industry is going to suffer an adjustment. However, I think some folks are overdoing their anticipation in that regard. I saw an article the other day that says some investors are getting investment vehicles together and soliciting money to invest in depressed real estate once the anticipated crash happens.
That is ridiculous. Real estate is not like the stock market, where if the market starts to decline, everyone unloads. Real estate is a very nonliquid commodity, and if there is a collapse, it will take years to unwind. Anyone who jumps in at the first sign of weakening is just going to ride the market down. And by the same token, once it becomes apparent that the "crash" has begun, there will be plenty of time to get the money together to invest in depressed real estate.
Couldn't the Chines devalue their currency incrimentally. Like three devaluations over a two year period?
Someone straighten me out, PLEASE!!! How are goods more expensive? I must be getting tired.
Note that they where all for the unpegging until Bush came out with support for it, and now they are all over the place with these bizarre arguements. You would think that our prosperity depends on the yuan peg. Perhaps we should be pressuring them to raise the peg. Perhaps 11 yuan to adollar. Then we will really have a roaring recovery.
However there will always be motivated sellers. People die. People get divorced. People retire. People have to move. So there will always be a strong sector of the market that must sell for whatever they can get.
There might be bargains. On the other hand, the market has risen so much in the last 5 years that it will take a lot to bring it back to ground.
In the late 80's and early 90's, r.e. was pretty depressed. Except for that time span however, the post-WWII history of real estate has been steadily up. With interest rates rising and given the fact that we just built a record number of new houses, it is difficult to see how the boom can continue. But I'm not expecting a crash--more like a softening.
Thanks in advance for explaining this to me.
The other day I was driving with a friend through the rural suburbs of Philly. We saw a clump of McMansions being built on no lot to speak of and advertised as $500k. I remarked that considering the lawn size it was $100k too much.
Well, the article just leaves as an open question what might happen that no one is expecting.
However, I think that what most economists would tell you is the greatest worry is that the yuan would soar, and the dollar would conversely plummet. That would mean that it would cost a lot more money for us to buy imported stuff, particularly from China. On the other hand, it would make it easier to export stuff to China.
American companies that have invested in China would suddenly find that their investments needed to be re-examined, maybe written off because the costs of producing stuff in China and shipping it back home would be much higher. Companies like Walmart that rely on cheap Chinese merchandise to fill their shelves will suddenly have to make other arrangements....
They aren't worried about a small change of say 10 or 20 percent. What they are worried about is if there were a huge change, maybe let's say, 200%.
They are right to discount the likelihood of that happening, though. China is an important trading partner of the US, but on the other hand, the volume of yuan/dollar conversions is pretty dinky compared to the total number of dollars out there, and floating the yuan is not likely to change that very much.
Thanks again!
Thank you for your insight!
It is nuts, but right after WWII, the experts predicted another depression. Instead, we had a real estate boom of epic proportions, which was still going on when I was growing up in the 60s. The whole time, the experts were predicting an imminent r.e. collapse, but the market just kept going up, even during recessions. It finally came to an end when they changed the tax laws in the 80s, and then got ugly when the banks began going under, foreclosing properties, and dumping them on an already depressed market.
But that bust took more than 5 years to unwind, and there was a time when no one wanted to own real estate, even at those reduced prices. Few realized that if they invested at those depressed prices, they would one day be rolling in dough. Instead, they were investing in the dot-com craze, thinking that's where their millions would be made.
These guys who have their money lined up waiting to invest in r.e. at the first sign of weakness don't have a clue what a r.e. bust looks like. They are too eager. Eagerness is what keeps the r.e. prices from falling. The minute there is a lull, they will be wondering if it's time to jump in. The result is that it will take a long time for the prices to adjust to lower levels.
If they really want to make money off a r.e. bust, then they have got to wait until no one (including themselves) wants to own r.e. and there is no money waiting in the wings even for a "good deal." And then they've got to grudgingly look for a bargain, keeping their fingers crossed that someday things will be brighter for the industry, and resist the temptation to invest in the same things that their buddies seem to be getting "rich" investing in.
It takes discipline.
The boom is being fueled by low interest rates. If that changes, then expect the r.e. market to change as well.
The inflation we have created by "devaluing" the dollar and have largely exported to China is about to come home to us. When the prices of Chinese goods rises, the prices of all our goods will rise, to us as well as to those foreign swine who have been conspiring to sell us cheap goods and raise our standard of living.
yuan me both...
How do you propose to prevent that? Tariffs and quotas would increase the prices more than letting the exchange rate float, and letting the exchange rate float would increase prices more than letting the Chinese peg the dollar.
We could slow down monetary growth, but that would cause interest rates to rise and slow down the economy.
Nothing is without a cost.
Disclaimer: Opinions posted on Free Republic are those of the individual posters and do not necessarily represent the opinion of Free Republic or its management. All materials posted herein are protected by copyright law and the exemption for fair use of copyrighted works.