- Part of the weak USD policy has aimed to shake CNY loose of its parasidic peg.
- This creates an inflation call option of sorts, because we know the US wants to pursue a weak USDCNY for trade purposes, but China cannot withstand the inflation & will have to appreciate CNY even more.
- To take advantage, I’m looking for CNY denominated bonds from US issuers.
The aim of the latest government stimuli could have been to inflate away our federal debt, help mortgagees, mend banks, stimulate domestic borrowing, and/or shake China off its US Dollar peg. Yet, if ever interrogated for the waste they lay upon the globe, Tim Geithner & Ben Bernanke will always cite their favorite parlay: China [and other emerging markets] had the autonomy to fight inflation by breaking its USD peg.
Look at the USDCNY chart for the empirical evidence:
China’s already feeling the domestic inflation. SocGen posted a piece this morning, which argued that China will turn to exporting that inflation via energy, metals & commodity price increases (which we all know has started, but SocGen says it will get worse by 2012).
Considered in isolation, that would be bad for the US, because American assets (equities) probably cannot withstand a snapback rally in the US Dollar if the Treasury were forced to stem-off rapid inflation. Yet, evaluating the macro perspective, I don’t think the Treasury will counteract such inflation. When you consider American policymakers’ thought process, the whole design is to force the Chinese to appreciate their Renminbi because it’s sucked the blood of American consumers (and the trade deficit) for so long. The Chinese have struggled with inflation for over a year now. They’re deep into the inflation battle, and they’re more threatened by a continued rise in prices:
The US has had its bout with headline inflation, but we’re still dealing with a more threatening deflationary undertow. Therefore, a marginal increase in inflation exacerbates the Chinese situation a lot more than the US, so it’s like an inflation call option: you know that if inflation runs high enough, China has to let the Yuan appreciate in response. The US can keep pursing a weak dollar against the Renminbi, but China can’t withstand strong inflation much longer. Do not confuse this with a broadly plummeting US Dollar Index (DXY), because CNY is not an input, and my bullish USD call is still en force. (See DXY components here.)
Should we buy CNY bonds to take advantage? I’m just worried about the credit risk… so I’m searching for some American companies’ CNY denominated issues.