Rudi’s View: Yuan Revaluation Over-Hyped

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“Having worked on the “sell side”, we can assure you that the pressures to be bullish at all times is intense”

– David A Rosenberg, Chief Economist & Strategist Glushkin Sheff.

By Rudi Filapek-Vandyck, Editor FNArena

Glushkin Sheff's David Rosenberg included a reminder in his daily market commentary this week about the underlying reflex in the financial community that is the main source for media comments and predictions about the likely direction for financial assets and markets – see the quote above.

Rosenberg worked many years for the Wall Street firm that uses a bull as its main trademark; Merrill Lynch – before the GFC turned the investment firm into financial ruin and US authorities presented it as prey to the Bank of America group. As we found out later, this happened under the motto of “don't ask what the country can do for you, but what you can do for your country”.

At a time when commodity markets in particular are once again brimming with excitement, hopeful an announcement by the Chinese authorities is imminent about a revaluation of the Chinese currency, it is good to be reminded that many in the financial community are simply looking for a reason to be positive.

Personally, I believe the revaluation of the yuan/renminbi will prove over-hyped, though commodities will probably move higher initially as a knee-jerk response when the announcement is finally made.

Why do I believe this? Because Chinese authorities are focused on avoiding their run-away economy from developing into the next uncontrollable bubble. In other words: the Chinese are increasingly looking into how, where and when to apply policy brakes.

A significant revaluation of the yuan/renminbi -as some market participants are hoping for- could possibly lift Chinese appetite for everything in between crude oil and gold, but it would thus also achieve the exact opposite Chinese authorities are looking for.

I can see a similarity with what happened in the gold market in October-November last year. Back then it was all about the never-ending weakness of the US dollar and whether the Chinese would buy gold on offer from the IMF, or whether they would buy it on-market.

As it turned out, the US dollar's slide wasn't endless, at least not for the time being, and the Chinese weren't interested in feeding an investment bubble in gold. The end result was that gold fell from price levels above US$1200 to below $$1100, and the precious metal has been struggling to seriously regain traction ever since.

Don't get me started about crude oil in 2008…

Call me a conspiracist if you like, but why all of a sudden is nobody talking anymore about further tightening by China and India?

The next meeting for the Reserve Bank Of India is scheduled for Tuesday next week and it would surprise not one economist if the RBI decided to hike interest rates, and possibly add some additional measures as well.

And China? Well China is looking towards the release of another set of bumper economic data on Thursday this week, including a first quarter GDP growth figure that is likely to print 11%-something. If this proves to be the case I would not be surprised to see Chinese authorities clampdown further on bank lending (through increased reserve requirements) and/or announce another 27bp rate hike soon – this Friday maybe?

I find it interesting, to say the least, that this week's release of new loan volumes in China have received practically no attention. Yet what the data revealed is that Chinese authorities might just be successful in what they are trying to achieve, which is less liquidity swirling around through their economy looking for a destination.

It turned out new loan volumes in China shrank in March by approximately CNY200bn to CNY510.7bn (compared to the previous month, not compared to last year). As quickly pointed out by analysts at Commerzbank, should the loan volume stay at around this level in each month for the remainder of the year, the Chinese government would have achieved its objective to curb new bank lending to CNY7.5 trillion (which approximately translates into US$1.1bn).

Bravo? Here's what Commerzbank has to say about it: “As a result, commodity demand and, hence, the import pull should decline markedly during the course of this year, which in turn should have a negative impact on prices.”

I bet you haven't read this comment elsewhere this week.

On a similar note, CommSec Chief Economist Craig James reports the combined market capitalisation of Australian banks (Big Four plus two regionals and RHG) reached a new all-time high this week, exceeding the level achieved at the peak of the share market in late 2007.

James notes the Banking industry sector on the share market is now valued at $306.7bn, up 125% from the lows recorded in January 2009 and equal to circa 22% of the broader share market.

He also notes -rightfully so- that the incredible recovery of the banking sector marks a very visible signpost for the global economic recovery that is underway.

What James doesn't mention is that shares in CommBank ((CBA)) and Westpac ((WBC)) are now starting to look fully priced, and I am talking FY11 projections, not this year's.

See also stories:

– NAB! And This Is Why – this week's Weekly Insights

– More Bank Doubt; NAB's UK Plan

– Brokers Turning On The Banks

– The Return Of The Bank Stocks Market Indicator

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