Jim Rogers on Chinese Currency and Trade War: My Thoughts

Currencies / China Currency Yuan
Mar 21, 2010 - 04:37 AM

By: Dian_L_Chu

In a Business News Network interview on Mar. 18, Jim Rogers, famous investor and creator of the Rogers International Commodities Index (RICI) speaks about the recent currency and trade confrontation between the US and China:

"If [you] slap somebody in the face, they are going to take a defensive attitude to save the face…I do not know why the United States is doing this in public, ..that never worked, especially with Asians."

Rogers – Float to Grow

Rogers thinks the U.S. should try to explain to the Chinese that it is to their benefits to allow some flexibility in their currency. For instance, yuan's appreciation will in turn lower the cost of China’s imports and its supply chain.

He acknowledges that the Chinese understand that their currency policy will need to change eventually in order to become a major player on the world stage. Although the yuan has appreciated some in the past few years, but it is just not up to the expectation of the U.S.

Rogers estimates Chinese renminbi (yuan) could replace the dollar as the next reserve currency of the world in the next 10 to 20 years.

My Take - Yuan Appreciation Could Increase U.S. Deficit

It is consensus that the United States has strong economic fundamentals attracting high rates of capital investment. On the other hand, the U.S. has a chronically low household saving rate, and recently a negative government saving rate as a result of the budget deficit.

As long as Americans save relatively little, foreigners will use their savings to finance profitable investment opportunities in the United States; the trade deficit is the inevitable end result.

As pointed out in my previous article, http://dianchu.blogspot.com/2010/03/chi ... se-of.html renminbi appreciation will unlikely achieve the intended effect of reducing the bilateral trade deficit, and could instead have a negative impact. Unless there is a significant shift in the domestic consumption/demand levels, the U.S. will need to procure either still from China, or from some other sources, but now at higher prices due to the yuan revaluation.

Rogers – A Non-American Style China Real Estate Bubble

Currently, the excessive liquidity trapped in the reserves is essentially causing various bubbles developing in many Chinese coastal and urban real estate sectors. Rogers sees the real restate bubble in China is one of price instead of credit. As such, a bubble burst will likely have a much more muted effect in China than the housing crisis in the U.S.

Rogers – Long Loonie, Short U.S. Bond

Rogers believes the Canadian dollar (loonie) is "one of the soundest currencies in the world on a fundamental basis.â€