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Friday, July 22, 2005

I was as giddy as a schoolgirl.

I woke up this afternoon to find that my money was being devalued versus the Yuan. This was not an unexpected development, but it was not altogether pleasant. I have a nagging suspicion that the next pair of shoes I buy will cost an extra dollar, which will ultimately bankrupt me like the proverbial nail in the horseshoe.

I've written about the Chinese' insistence on buying up US treasury bonds in order to avoid repatriating their earnings, thus keeping the Yuan low and the dollar high. This imbalance is responsible for part of the record trade deficit, as well as the USGOV's ability to spend and borrow like drunken senators without incurring punitive interest rates. My concern has been that, when the inevitable revaluation occured, it would devalue the dollar enough to spark a selloff by smaller Asian countries that cannot afford the fluctuation. This could end in a full-scale selloff of dollar assets, which would be a bad thing.

So far, this has not happened. The Yuan is up 2%, give or take. My impression is that China will continue selling dollars, but at a conservative pace. Exactly what that pace is is a mystery. 0.1% per week? Will they wait until currency and bond markets stabilise before beginning each round of revaluation? Are they finished already? Is their medium-range goal to float their currency and become a superpower?

If I had currency, it would be backed by a basket of nonperishable commodities. But that's just me. That way, a crisis of confidence in the government couldn't destroy the currency, and inflation would be controllable. Also, I would be able to swim in the mountains of jewels in the reserve bank.

Like Scrooge McDuck.

Anyway, the long-term effects on US stocks should be good, although retailers will suffer and manufacturers will gain. In the short term, it may be wise for you day traders to shift out of dollars and into dinars or pounds.

The semi-political consequences are more serious. China has been making moves on oil supplies *coughVenezuela* and this revaluation marks a departure from the second-world producer strategy to the first-world buyer strategy. China will be able to buy foreign companies, mineral rights, and products more easily. This is a slight change. However, the fact that they made the revaluation signals that they intend to buy foreign companies and mineral rights.

China also needs to protect intellectual property in order to develop a cutting-edge technology sector. Now that imports may become affordable, the government may be willing to clamp down on domestic piracy of international patents and trademarks. Mass importation will not be possible, as it is in the US, until there is a more significant change or flotation of the Yuan. The sheer size of China's emerging middle class may produce large effects in the international market, even with a large per capita level of knockoff merchandise.

I suggest we start teaching Mandarin in schools.


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