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China’s dollar peg.
The Fed’s loose monetary policy has succeeded in driving down the dollar with respect to many other currencies, particularly the Euro. Yet the yuan is still linked to the dollar despite China’s aggressive monetary expansion. How can this be? Surely the dollar depreciation should have broken the peg and forced the yuan to appreciate? Well, like all things economic, we have been there before.
http://www.safehaven.com/article-8427.htm
Manipulating currencies is not a costless exercise, far from it. To prevent the yuan appreciating against the dollar China's central bank (People's Bank of China) has to print more and more yuan with which to buy dollars. While this has been going on domestic credit expansion has reached dangerous levels. M2, currency and credit has been racing ahead at more than 17 per cent a year. This is akin to a runaway monetary train. Not surprisingly, manufacturing investment, real estate and the stock market are booming. Since last year alone the Shanghai stock market index has rocketed by more than 300 per cent. This has all the earmarks of a classic boom.
The PBOC is certainly not blasé about the situation. It has raised interest rates four times this year, with the one-year rate now standing at 7.02 per cent. These increases have not even dented the boom. This has led the PBOC to make noises about further interest rate hikes. It can make all the noises it likes, but this monetary-driven boom is going to require a little more fortitude on the part of the bank. The problem is not a purely monetary one. There is the vital question of the capital structure to be taken into account, a question that will have to be left for another article. Suffice to say for now that the distortions caused by a reckless monetary policy will require painful adjustments.
When the Chinese real estate and stock markets crash and burn (as they must) the entire global fnancial house of cards is going to be rocked.
I sent an email to our management team in June that we are going to revise our 3 year exit at the end of 2009 to an early exit at the end of 2008. 2009 is going to be called the year of pain I believe. I love market research and history. You can now Google anything you ever needed to know to minimize risk.