Today's WSJ (sub. only) suggests the late 2004 optimism over impending renminbi revaluation has definitely burned itself out.
After feverish expectations that China would let its currency appreciate, a few market signals suggest that some speculators no longer see a revaluation of the yuan, at least for now.It's not just the Hang Seng that folks are looking at for tracking hot money into China. The Shanghai property market has cooled markedly in the last six months, too. That being said, investment banks haven't pulled back from their predictions. J.P. Morgan Chase looks into its crystal ball and sees a remarkable 7% rise in the renminbi against the dollar this year, and Goldman Sachs divines a 5% uptick.
A widely used proxy for assets denominated in Chinese yuan, Hong Kong stocks are down almost 5% so far this year, after rising 13% in 2004, as measured by the benchmark Hang Seng Index. The premium quoted for the yuan on a lightly traded forward market has declined 25% since the start of the year, a sign that traders are more confident the currency, also known as the renminbi, will stay put. And the Shanghai property market, another magnet for speculative cash, appears to be coming off the boil.
Investors are becoming more skeptical that the yuan is likely to come unshackled anytime soon, said Cheah Cheng Hye, managing director of Value Partners, which operates a $550 million fund investing mainly in China-related stocks. "The story is looking very shaky," he said.
Economists at HSBC, Hong Kong's biggest lender, don't see an appreciation in the yuan this year. "I don't think there's any question that the appetite for positioning for renminbi appreciation has diminished," said Richard Yetsenga, Asia currency strategist with HSBC.
China has the US over one hell of a barrel. If the Bush administration threatens tariffs on Chinese textiles, for example, China can threaten to cut back on its purchases of US debt. In this game of chicken, I say Bush swerves first, especially if he thinks he can seriously push through a $2 trillion Social Security borrowing scheme through Congress this year. Dubya will gladly sacrifice US manufacturing on the altar of his historical legacy.
Look for a lot of heat but precious little light at the London G7 meeting next month.