Incisive comment by Larry Kudlow on China
Larry Kudlow was substituting on Bob Brinker’s radio program yesterday and said this, regarding the impending upward revaluation of the renminbi:
Developing countries’ currencies don’t float — they sink
As you know, there is concern that the renminbi is undervalued — indeed, as we have noted, Senators Schumer and Graham have gotten a bill passed in the Senate calling for a 27.5% tariff on Chinese goods. The 27.5% figure is the amount that the dollar has depreciated since 2001.
Kudlow’s point is a wise one. Even if the Chinese currency appears somewhat overvalued today, unpegging it from the dollar is an invitation to monetary and fiscal abuse, the kind that characteristically sends developing countries’ economies into perilous waters. With the $420 billion in bad loans at China’s big banks, and the enormous amount of hot money in the country now, pressures for political manipulation of the yuan might prove hard to resist in the absence of the peg.
But maybe the real danger sign for China lies elsewhere. From the WSJ’s Trading Shots column:
Mark Gongloff: China made the cover of “Newsweek.” Uh oh.
This is “China’s Century,” the news magazine declares this week. Any China investors who believe in “cover jinxes” should head for shelter immediately. According to jinx theory, by the time a trend, athlete, currency or nation catches the attention of our weekly magazines, its run is pretty much over. Bill Rodgers won seven marathons in a row, made the cover of “Sports Illustrated” in 1978 and finished sixth in his next race. This year, Newsweek and “Time” warned of the shrinking dollar, not too long before a greenback recovery….
[M]oney supply is still growing as if the People’s Bank of China is dumping yuan from helicopters, and all the recent chatter about a revaluation of the currency is only attracting more speculative money. All this money sloshing around has some observers worried about a spike in inflation, which could lead to a recession for China’s economy. “No nation has ever emerged from less-developed to developed without hitting at least one bump along the way,” says Carl Weinberg, chief economist at High Frequency Economics. “We do not see why China should expect to be the first exception to that rule.”
We would like to further note a danger sign for China: insipid editorials in the New York Times:
Washington must adjust to a rising China. The future peace and prosperity of Asia depend on it.
If the Times says that China is rising, it’s time to short China.