While Tim prepares for his public questioning, Charlie Morris has put the finishing touches on the March edition of The Fleet Street Letter. I read it this weekend. You’re going to love it. Charlie puts China’s current troubles in the appropriate historical context.
This is why I was so excited about bringing back The Fleet Street Letter in the first place. And why it’s such good fortune that we have Charlie in charge. He was neutral on whether the yuan was overvalued or undervalued until he looked at the data. And look he did. Thoroughly and meticulously.
The result is the March report. He shows that the “low-hanging” fruit of GDP and per-capita income growth from state-directed capital investment is over. If China is to grow from here, it needs a better institutional order. He goes into detail about what he means by that (and shows why, incidentally, it would be hard to replace London as Europe’s financial centre).
But the most important insight I gleaned was that the market already knows what China’s central planners don’t. The market already knows what the yuan is worth. And it’s pricing global growth and stocks accordingly, taking into account what China may accomplish with a further devaluation.
Not that China will admit that it wants or is pursuing a weaker currency. Just the opposite in fact. Zhou Xiaochuan, the governor of the People’s Bank of China (PBOC), blamed “speculative forces” for yuan volatility. He told reports there was no basis to expect further devaluation. And he said not to worry about the level of foreign exchange reserves, which have declined by almost $1 trillion as the PBOC supports the yuan in a trading range against its US dollar peg.
Category: Economics