February 4, 2005 11:04 AM
If Yuan Moves, Will U.S. Rates Go Up?
Excerpt: Still, it isn't clear that a Chinese revaluation, on its own, need have much impact on U.S. interest rates. In fact, there's good reason to believe that, if and when China makes a move, the market's concerns will prove unfounded.
Finance ministers from the Group of Seven industrialized nations will converge today on the clubby Lancaster House in London, where they will raise a question that, depending on whom you believe, could affect pocketbooks from Beijing to Peoria: Should China allow the value of its currency, the yuan, to rise against the dollar.
In U.S. bond markets, the question has long fueled anxiety, because many investors believe that China's policy of maintaining a fixed yuan-dollar exchange rate has helped keep U.S. interest rates unnaturally low. The fear: A stronger yuan would curb investment from Asia, causing bond prices here to fall and pushing up the interest rates that U.S. consumers pay for loans on everything from cars to homes.
"We care an awful lot about this," said Jason Evans, co-head of Treasury trading at Deutsche Bank in New York.
Still, it isn't clear that a Chinese revaluation, on its own, need have much impact on U.S. interest rates. In fact, there's good reason to believe that, if and when China makes a move, the market's concerns will prove unfounded.
"I think a lot of people in the market, because it's been so stable for so long, are looking for anything that might cause the next breakout," said Steve Rodosky, a senior vice president at Pimco, a big manager of bond funds based in Newport Beach, Calif. "You might see a flurry of activity in anticipation of it, but for the real end users, I don't see it as such a big event."
At the G-7 meeting, which runs today and tomorrow, the finance ministers will, among other things, look for ways to fix what many see as a global imbalance. China and other Asian nations, in an effort to maintain export-led growth in their own economies, have been buying vast numbers of dollars and investing them in U.S. assets such as Treasury bonds. Asia's export policy has made Chinese stereos and toasters cheap in dollar terms, but, in the eyes of some G-7 officials, it also has exacerbated the tendency of U.S. consumers and the government to spend beyond their means.
That's why on Saturday, G-7 ministers will have lunch with Chinese finance minister Jin Renqing and People's Bank of China Governor Zhou Xiaochuan, most likely to encourage a revaluation of the Chinese currency against the dollar.
The meeting probably won't result in any action, but that hasn't stopped wary bond traders in New York from parsing rumors about a Chinese "float." The most recent data on money flowing into U.S. bonds make it easy to see why they're concerned. From January through November 2004, the central banks of Japan and China bought about 30% of all the new Treasury securities the U.S. issued to finance its budget deficit, which reached $412 billion in fiscal 2004. Japan was initially the largest buyer, but more recently China has taken the lead among Asian countries, increasing its holdings by $18.5 billion from September through November.
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