Reply #47: Greenspan Misses the Point About Yuan [View All]

http://quote.bloomberg.com/apps/news?pid=10000039&refer=columnist_mukherjee&sid=aFaucAQ5PK6o

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In theory, Greenspan is right about the central bank ``finding some difficulty'' in selling debt. However, the theoretical premise has been turned on its head in China: Not only is the central bank selling more of the so-called ``sterilization'' debt, it's doing so at lower yields. The banks that are buying the debt appear to be oblivious to the risk of inflation accelerating in the months ahead.

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With inflation in China at 2.7 percent in March and expected to rise, the only reason Chinese banks are buying treasury bills at such low yields is because they are extensions of the communist state. China's big four state-run banks accounted for more than half of the banking system's assets of 31.5 trillion yuan last year.

Yuan Debate

This game can go on until the top four banks, which had $188 billion of bad loans at the end of September, or 15.7 percent of their total lending, are made truly independent.

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In the past too, Greenspan has obfuscated the yuan debate more than he has helped illuminate it. He said at Stanford University's economic summit in February 2004 that it was ``fairly reasonable'' to expect the yuan to rise, driven by the ``sheer basic underlying momentum of productivity.''

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This too is a lame reason. Asian mercantilism is all about sacrificing the present for a prosperous future. It makes possible, and is in turn made possible by, the extravagance of the U.S. government and consumers who are equally adept at doing just the opposite: sacrificing the interests of tomorrow's taxpayers for their financial excesses today. Why should China alter its present before the U.S. rethinks its future?

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Speculators put their money where Greenspan's mouth is. That includes Shanghai property whose prices have shot up 19 percent the past year. It doesn't matter why Greenspan thinks what he thinks. If he says the yuan will move ``sooner, rather than later,'' speculators will ensure that China gets such a deluge of dollars it has no option except to move -- sooner, rather than later.

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