In case you missed it, great FT piece by Peter Tasker of Argus Research about asset bubbles in Japan and China and the role of FX policy. It’s all about Macro these days,
The message is clear. It wasn’t the rise in the yen which sunk Japan, but the response, which was an egregious policy mistake. So if you really wanted to sabotage the rise of China, the best way would be to facilitate a gigantic asset bubble.
In present circumstances, that would probably be best accomplished by leaving the renminbi where it is. This would lock high-growth China into the super-low interest rates appropriate for the weak US economy, force savers out of cash and into the housing market, and ensure credit grows much more than gross domestic product – the perfect mix for bubble trouble.
The degree of euphoria surrounding some emerging economies is already troubling. The Indian and Indonesian stock markets are trading at price earnings ratios of over 40 times, based on ten-year average earnings. You would surely need a hundred years of fortitude to buy Mexico’s recently-issued 100-year bond at a yield of 5.6 per cent. Bubble and bust in China, on which the world is now so dependent for growth and optimism, would likely tank the commodities markets, set off a second round of deflation, and end the emerging markets boom in the most spectacular way possible.
Today’s rate hike in China is crushing gold and other commodities and adding to the risk aversion, which began yesterday with the sell-off in Apple and IBM after their earnings announcements. All other things [animals] being equal, the rate hike in China should weaken the dollar, but as Orwell once said, “some are more equal than others.” One country’s capital account is more liberal than others.