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Jim Rogers on Chinese Currency and Trade War: My Thoughts

Currencies / China Currency Yuan Mar 21, 2010 - 04:37 AM GMT

By: Dian_L_Chu


Best Financial Markets Analysis ArticleIn a Business News Network interview on Mar. 18, Jim Rogers, famous investor and creator of the Rogers International Commodities Index (RICI) speaks about the recent currency and trade confrontation between the US and China:

"If [you] slap somebody in the face, they are going to take a defensive attitude to save the face…I do not know why the United States is doing this in public, ..that never worked, especially with Asians."

Rogers – Float to Grow

Rogers thinks the U.S. should try to explain to the Chinese that it is to their benefits to allow some flexibility in their currency. For instance, yuan's appreciation will in turn lower the cost of China’s imports and its supply chain.

He acknowledges that the Chinese understand that their currency policy will need to change eventually in order to become a major player on the world stage.  Although the yuan has appreciated some in the past few years, but it is just not up to the expectation of the U.S.

Rogers estimates Chinese renminbi (yuan) could replace the dollar as the next reserve currency of the world in the next 10 to 20 years.

My Take - Yuan Appreciation Could Increase U.S. Deficit

It is consensus that the United States has strong economic fundamentals attracting high rates of capital investment. On the other hand, the U.S. has a chronically low household saving rate, and recently a negative government saving rate as a result of the budget deficit.

As long as Americans save relatively little, foreigners will use their savings to finance profitable investment opportunities in the United States; the trade deficit is the inevitable end result.

As pointed out in my previous article, renminbi appreciation will unlikely achieve the intended effect of reducing the bilateral trade deficit, and could instead have a negative impact.  Unless there is a significant shift in the domestic consumption/demand levels, the U.S. will need to procure either still from China, or from some other sources, but now at higher prices due to the yuan revaluation.

Rogers – A Non-American Style China Real Estate Bubble 

Currently, the excessive liquidity trapped in the reserves is essentially causing various bubbles developing in many Chinese coastal and urban real estate sectors. Rogers sees the real restate bubble in China is one of price instead of credit. As such, a bubble burst will likely have a much more muted effect in China than the housing crisis in the U.S.

Rogers – Long Loonie, Short U.S. Bond

Rogers believes the Canadian dollar (loonie) is "one of the soundest currencies in the world on a fundamental basis.” He has owned the Canadian loonie “for years” as a long-term play, with his recent dollar positions as a short-term momentum play.

He also says the only other bubble in the world he sees right now is in the U.S. long bond market, and he expects to short that market in the "foreseeable future."

"The concept of how anybody would lend money to the United States government for 30 years, in U.S dollars, is just incomprehensible to me...even at 6%, it's just staggering."

My Take – Many Bubble Candidates Ahead of China

I've dismissed the so-called "Chinese real estate bubble crash" catastrophic scenario in several of my articles.  Admittedly, China's real estate sector is currently in the overheating zone; however, a U.S.-style bubble is less likely primarily due to a much lower buyer leverage as compared with the U.S. and a market structure null of debt securitization.

As for a bubble burst, there is currently no shortage of highly qualified candidates in the Western Hemisphere, with more up-and-comers waiting in the wing.  For instance, Europe's PIIGS countries (Portugal, Italy, Ireland, Greece, and Spain), the U.S. and the Great Britain, based on recent rating agencies' warnings, just to name a few.

Rogers – Protectionism = End Game

"Nobody has ever wanted a trade war, as it is the end of the whole game and disastrous for everybody's concerns."

Rogers thinks current protectionism originated in the U.S. has a contagion effect, which will likely exacerbate global geopolitical and trade tensions. He cautions that just as the U.S. protectionism in the 30's did not help with the Great Depression, the current protectionist measures will unlikely have that much positive effect on the economy. 

My Take - Serious Trade War Brewing

A synchronized recovery in China and the U.S., as we are presently witnessing, will undoubtedly heighten the competitive currency devaluation. It appears Washington will argue in perpetuity that the renminbi is undervalued as long as U.S. imports from China exceed our exports to China.

Meanwhile, Paul Krugman’s call of labeling China as a “currency manipulator” is being increasingly speculated to be included in the Treasury Department’s semi-annual report on foreign-exchange-rate practices, due to be released in April.

Tensions and trade feuds are bound to persist since the U.S. places more emphasis on the short-term "fixes" through price and the yuan exchange rate; whereas the Chinese put more emphasis on medium and long-term structural and institutional change.

眼中有敵,天下皆敵;眼中無敵,天下無敵 (One's attitude determines how one sees things) ~ Chinese proverb

Dian L. Chu, M.B.A., C.P.M. and Chartered Economist, is a market analyst and financial writer regularly contributing to Seeking Alpha, Zero Hedge, and other major investment websites. Ms. Chu has been syndicated to Reuters, USA Today, NPR, and BusinessWeek. She blogs at Economic Forecasts & Opinions.

© 2010 Copyright Dian L. Chu - All Rights Reserved Disclaimer: The above is a matter of opinion provided for general information purposes only and is not intended as investment advice. Information and analysis above are derived from sources and utilising methods believed to be reliable, but we cannot accept responsibility for any losses you may incur as a result of this analysis. Individuals should consult with their personal financial advisors.

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