Salient to Investors:

Vincent Ho writes:

China has kept wages low through monetary policy to attract capital investment from manufacturers, thereby exporting deflation as low labor wages keep prices of manufactured goods lower.

China’s central bank will intervene to keep inflation relatively low and stop any significant deflation that would curtail economic growth. Periods of significant inflation are likely to be over in China, meaning appreciation of the renminbi will continue, barring any significant worldwide economic slowdowns.

The US can benefit from renminbi appreciation because first the US would find it easier to pay off its mountain of debt and second, US exports would increase.

Short-term, the renminbi will stay where it is because of conflicting pressures:

    • It has to remain relatively weak to a stronger dollar and a weakening yen – China’s economy still heavily relies on US imports.
    • China relies on Japanese imports so an appreciating renminbi would deter Japanese consumers.
    • The renminbi needs to remain relatively strong to stabilize China’s financial market and protect the savings of a very large rural population, decrease incentives for capital flight, and maintain faith in the renminbi for investors.

Chinese growth will slow. pushing back  the date of overtaking US GDP to 2025 from 2017.

China will grow 7.5% in 2013. Jiming Ha at Goldman Sachs estimates growth to slow to 6% annual until 2020 due to a slowdown in the investment activity cycle, and the IMF estimates growth at 8.5%.

The renminbi will appreciate over the coming 5 years and for the long-term. The renminbi is much weaker than the dollar because its economic model currently favors exports over imports. Household consumption will increase as China’s central bank pursues monetary policy favoring consumers over exporters.

World Bank data shows China’s consumption at only 34% of GDP in 2011 versus 55% for Japan in 1980, since when the yen has appreciated well over 110% to the dollar and consumption increased to 60% of GDP in 2011. In 20111, household consumption was 70%, in the US, 74% in Greece, and 60% in Indonesia.

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nvestor Jim Rogers created somewhat of a stir when he made his predictionthat China’s renminbi (CNY ) will appreciate 300-500% to the US dollar (UUP ) in 20 to 30 years. He was quoted saying that if anyone wanted to sell him renminbi he’d be a buyer. For now, there are plenty of people who will take him up on that offer. These type of predictions however raise attention to important questions on what the role of the renminbi (FXCH ) will be as China grows and America is affected. Briefly digging into China’s macroeconomic past, present, and forecasts of the future provides relevant insights.

The Role of the Renminbi In the Global Labor Market

Looking back 30 years starting in the early 1980s, the creation of special economic zones to attract foreign investment was a large step towards market reforms, but the global impact it would have on the world labor markets is understated. China has kept its wages low through monetary policy to attract capital investment from manufacturers. With well over a billion people added onto the global workforce this was a huge abrupt change that has kept labor wages low since. China has been a exporter of deflation as low labor wages keep prices of manufactured goods lower. Not only is this a great thing for consumers around the world who purchase these products but the role of the renminbi, which is valued lower than the dollar, has spurred economic growth elsewhere as most consumers who save on these goods spend it on other goods.

Monetary Policy and Controlling Inflation

China’s central bank will intervene to keep inflation relatively low. China’s economic growth is a offshoot of monetary policy. Compared to the boom-bust cycles of the past China’s inflation has since stabilized considerably. There were two periods in 30 years, the late 80’s and the middle of the 90’s, where unsustainable inflation topped 25%.

China’s CPI Inflation 1994-2013