1. The poor world economy scares Chinese leadership, not just economically, but politically. Thus they will not attempt any policy that would hurt China's exports, even if it was a short term hurt for a long-term gain. Politicians everywhere seem to always take the short-term pain-killer policy. So, why not just juice up the loans from the state run banks and keep the exports for bonds model going?
2. I suspect the Chinese view is that even with the weird imbalances and exposure to US bonds, they are getting tons more in benefits, like a massive industrial base, foreign-investment (much of it in joint ventures that end up with technology transfer.)
Thus, my prediction is that the RMB sits at 7.85 for a long, long time. I'd say 2011 at the earliest for something to happen. Its also possible for a devaluation to happen.
So I see lots of downside and not much upside.
There still is the interest rate that is higher in China than the US, though. Not sure how high interest rates are in China.
.....
I have no idea what happens if the US has serious inflation. Do the Chinese keep the currency pegged then? Do they keep buying bonds?
1 comment:
The Chinese are evading this issue with in-kind/barter trade deals that dont involve currency. I suspect that they will attempt to shed their dollar holdings at some point.
I agree with your analysis of the yuan; there is no upside to an upward valuation.
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