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Thursday, January 20, 2011 1:24 PM


"Consensus Nonsense"; Is the Yuan Undervalued? Who Wins a Currency War?


Inquiring minds are playing a pair of CNN Money videos with Jim Chanos regarding various aspects of the Chinese economy, China's huge property and credit bubbles, the Yuan, and commodities. Unfortunately there is no way to embed the videos, but here are links with a brief synopsis.

Yuan May Be Overvalued

Yuan May Be Overvalued

"Nobody wins a beggar-thy-neighbor devalue your currency race to the bottom. That we know. It simply does not work. We found that out in the 1920's. ... Any economist worth his salt will tell you tariffs add costs. Free trade is the cheapest of all, but politics interferes in these things. Politics can get out of control quickly. Currencies are a case of the tail wagging the dog. I do not think the Yuan is terrifically undervalued. In fact, I think it might be overvalued. The whole world thinks it's undervalued and everyone is positioned for it to be undervalued. When everyone is positioned on one side of the boat you might want to explore the other side. The yuan is overvalued because of China's credit problems, the amount of RMB regulators will have to flood in to refloat the system ...."

I side with Chanos.

China's Credit Bubble

China's Real Problem

Hedge fund manager Jim Chanos says China's credit grows 3 to 4 times as fast as its economy expands. China is in uncharted territory in the real estate bubble, debt, and 9.6% GDP growth.

"In an investment driven economy, once you finish putting up a building, you have to start all over again and put up another building. Anyone using common sense, this leads to its own set of problems. Everyone gets affected by China's Real estate bubble bursting. The US get affected least. The US is not dependent on resource exporters like Australia, Canada, and Brazil. Those will be the economies that will be hit the most. The real problem is China's credit growth is somewhere between 25 and 35% of the economy. They are expanding credit 3-4 times as fast as their economy which is growing at 9%. Bulls point out that individual purchasers of apartments are not highly leverage. What they are missing is the system, which is geared toward fixed investment is massively leveraged. The system is simply not stable. There will be a reversion to the mean pretty hard for some industrial commodities. ..."

Once again I side with Chanos.

China Acts Only Under Pressure

Here is a video of someone who gets it completely wrong.

China Acts Only Under Pressure

Economist Fred Bergsten says China only overcomes their opposition to a stronger yuan when they're pressured from the rest of the world. Bergsten thinks the Yuan is at least 20% undervalued against an average of global currencies and 25-30% against the US dollar.

Bergsten's view is what I call "Consensus Nonsense".

For further analysis, please see Shanghai Prepares for Property Tax to Curb ‘Speculative’ Buying; China Addresses Symptom NOT Problem

Mike "Mish" Shedlock
http://globaleconomicanalysis.blogspot.com
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