China is No Longer an Emerging Economy!

As I woke Monday morning I saw that the Asian markets, particularly the Shanghai Composite, were selling off sharply. And I thought to myself, “oh no, here we go”. My general feeling is that the US equity market is overbought as the valuations haven’t quite caught up to price. Yet the US equity markets finished the day positive. What gives?

It is no secret by now that China is funding US debt through its purchase of US Treasuries with surplus money supply gained from US trade imbalances and China’s peg to the US dollar. As the US dollar declines in value, so does the value of the Chinese Yuan. This in turn makes China’s goods cheaper to the rest of the world, which continues to perpetuate the cycle of Chinese economic surplus.

Now I have nothing against China making money as I am a capitalist at heart, but now it’s time to level the playing field.

China is no longer an emerging economy, but rather the richest nation in the world!

Well actually, they are the third largest by GDP, but considering the massive debt that the US is accruing at an alarming rate, I wouldn’t be surprised to see them move up the list by year end. Which brings me to the point: why do they need to peg their currency to the US dollar, or even a basket of other currencies for that matter?

They want to be a major player on the world stage, yet are acting like impetuous children. Well I say it’s time for China to grow up! China should be forced to allow their currency to float in the free market. While the initial pain may be great, they could mitigate the impact by showing their willingness to work with the other countries around the world and could do it in stages. By some accounts the Yuan could strengthen by 20% to 30% just by removing the peg, not to mention how it would respond to currency markets.

Obviously the feeble attempts at political pressure from the US have failed miserably and now it’s time to get tough. People have become afraid of what will happen if we make them mad at us; will they dump our bonds?? I say who cares, we should threaten to default outright on any bonds they own and not allow them to trade them in the free market if they don’t float. So now they have a choice, either take a 20 or 30% haircut by letting their currency float, or take a 100% loss because we won’t pay them back or accept their currency.

While this is an extreme measure and I’m really being a bit facetious here, they really have been allowed to operate in an unfair economic environment. Should something as radical as I propose happen, I would be long (CNY) or (CYB), two Chinese Yuan ETFs.

At the end of the day, their policies have contributed to global financial catastrophe and it’s time that they admit their role in it and make the changes necessary to fix it. And as was apparent on Monday, the US markets no longer consider China a child, but rather an adult economy with its own problems. It's time for China to grow up!

Otherwise, other countries around the world won’t want to play in the sandbox anymore.