The Chairman… perfecting the upswing (photo: Wikipedia)
The fine folks over at Allianz Global Investors ask the question; “Why is China’s upswing likely to continue?” Dave gives his answers.
Allianz says… China’s currency reserves amount to U.S. Dollars of $3,000 billion.
Dave says… That makes China’s reserves equal to 30 Facebooks (based on their pending IPO valuation of $100 billion). Wow!
Allianz says… China’s currency reserves would be sufficient to buy the entire global gold reserves.
Dave says… Exactly. Please try to buy them and when you do gold will be $50,000 per oz. and your reserves will be worthless relative to gold.
Allianz says… Domestic developments, such as the pick-up in inflation and weak domestic demand, suggest China will permit a gradual renminbi appreciation.
Dave says… Huh? How exactly is it that “weak domestic demand” and “renminbi appreciation” (i.e. Americans can’t buy Chinese TV sets at Best Buy anymore) equate to a China’s upswing being likely to continue. Did I miss something?
Allianz says… China can boast a security net for its currency.
Dave says… That’s right. China’s currency is CNY. You’re selling CNH. China’s currency reserves are in CNY, not CNH.
Allianz says… China will probably continue to drive global growth.
Dave says… Don’t bet on “probably.” Do bet on definitely.
Allianz says… Due to capital and exchange-rate controls demand has a smaller effect on the exchange rate of the onshore renminbi (CNY)
Dave says… Who controls the capital and exchange-rate controls? Oh yeah… the Chinese government. You can trust them.
Allianz says…. Increasing exchange-rate spreads between the CNH and the CNY cause Chinese companies to conduct their FX transactions (renminbi into other currencies) in Hong Kong. As a result, the supply of renminbi in Hong Kong increases.
Dave says… I thought you just said that capital controls are what allow the supply of CNH Renminbi to increase in Hong Kong. Now you’re saying that it is the spread. Which is it? Is it price discovery or manipulation? Oh yeah… it’s manipulation.
Allianz says… Arbitrage opportunities for Chinese companies help to optimise the exchange rates of the offshore and the onshore renminbi (if the exchange rate is the same, there will be no arbitrage)
Dave says… I thought you said “only local and selected foreign investors” may invest in chinese currency. Now you are saying Chinese companies engage in price discovery narrowing the spread and eliminating the arbitrage. So is this a free-market engagement or simply a few hand-picked banks that are doing the dirty work for the People’s Bank of China by trying to trick folks into believing that Renminbi in CNY is the same as Renminbi in CNH?
Do you really expect Dave, or anyone else for that matter, to believe that “Chinese companies” would engage in this arbitrage if they were centrally directed to no longer engage in the arbitrage? You’re counting on them to create the equilibrium between the two disparate currencies? Dave don’t play that game. It’s called Communism.
Here’s the new brochure… read it for yourself: http://www.allianzglobalinvestors.ch/Documents/PRS_RenminbiCurrency_b2b_en_EU_0112.pdf
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