Keep Watch On The Yuan & Asian Currencies.....

RMB TO WEAKEN?: (contributed by Chan Cheh Shin - Fund Manager)

Thoughts for October 2012............

We often hear analysts and economists telling people that there is nothing to worry about China's capital outflows as the world No. 2 economy has US$3.2 trillion in FX reserve. This, however, ignores the impact of a shrinking FX reserve on Chnese liquidity. Capital outflow is a drain to China domestic liquidity.

The People's Bank of China (PBoC) does have US$3.2 trillion of so-called "fire power" to prop up the currency in the unlikely event of massive capital outflow, but the success of it will come at the expense of domestic liquidity.

PBoC might use other tools (on top of the routine use of reverse repo) to ease liquidity, such as outright bond buying, or perhaps guiding a depreciation of the Chinese yuan (as Renminbi is commonly called) and hope that inflows will appear again.

And the latter option appears to be what the PBoC is actually using. As the US Fed announced QE-Infinity, at some point it may (or perhaps not) necessitate PBoC FX intervention again, essentially to print Chinese yuan in order to bring the price closer to the fixing.


Watch out!.......for other Asian currencies to possibly slide too.....

Question: Will an exchange of new party leader have a significant positive impact on China economy?

My opinion: No correlation at all. In fact, the political/position in-fighting within the party since March 2012 this year may only result in the following two outcomes:

* A mad rush to pump up the economy so that the new "leader" will look good. But it will be bad for the fundamental economy as the growth is again pumped up by stimulus.

* Party members will spend much more of their energy in jockeying for positions and thus put the economic growth plan to the back seat.

Happy Thinking!