China Revaluation: U.S. Called For a Stronger Yuan, It May Just Get One

April 21, 2011
There are rumors that China will conduct a very large upward currency revaluation of perhaps 10% over the Easter weekend.

Conditions in China are getting increasingly unstable, including a trucker strike today in Shanghai. This revaluation move seemed plausible to me a months ago, and it is now necessary to save China from major inflationary upheaval. A major goal will be to disgorge the crack up boom speculation and hoarding of commodities and other assets.

It would completely upset all crowded global trades now in place. To make it effective, it would have to be large action closer to 10%, as incrementalism backfires.

Then if necessary it could be backed up with more rate increases. The idea is also to increase the standard of living of ordinary Chinese. It will cool off and further slow down the maladjusted Chinese economy.

This will result in further shrinkage (sacrifice) of the already rocked export sector [China Exporters Going Down] to the U.S., and a large price increases for those goods (transmit inflation to the U.S.). U.S. Treasury yields would also spike. Recyling U.S. endless U.S. dollars no longer makes any sense.

China's officials have been warning around the clock that foreign reserves are just too excessive, especially those of the U.S. They also warned Bernanke about QE2 and he ignored them. The U.S. has called for a stronger yuan and will now learn the downside of it's policy. Paybacks are hell.

There is also talk of a Greek or even a PIGGS restructuring being announced over the weekend.

I would theorize that China could play a role similar to the old IMF in financing a chunk of the new debt. Bankers and bondholders will take a loss on the bonds, and the Chinese would help recapitalize sick banks.

Greek bonds are trading at 60%of par, which would suggest a haircut of about 35% on the new structure. The would accomplish two objectives: allow them to dump no yield UST Old Maid Cards and reposition into better yielding European soverigns. At the same time it would build goodwill in Europe while landing a blow to U.S. hegemony.

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