Monday, November 10, 2003
Stephen Roach on China
Stephen Roach writes about the currency implications of a slowing Chinese economy. I am not sure I see any evidence of a slowdown within the Chinese economy, but then I don't have enough information to dispute Andy Xie's and Roach's perspective that there will be a policy-induced (credit-tightening) slowing in 2004.
If the slowdown in China in 2004 turns out to be sharp enough, the cyclical deceleration in demand for commodities could overwhelm the structural demand for these items. A negative terms-of-trade shock should hurt commodity currencies such as AUD, NZD, and CAD. Further, from a currency valuation perspective, the risk of a correction in these currencies is real. Our fair value range is 0.61–0.69 for AUD/USD and 1.27–1.43 for USD/CAD, depending on the valuation metric. AUD/USD is already protruding from the top of its fair value range. At the same time, the CAD is now overvalued according to eight of our 12 valuation specifications. Lingering in over-valued territory should help push these currencies lower against the structural USD correction.
If the slowdown in China in 2004 turns out to be sharp enough, the cyclical deceleration in demand for commodities could overwhelm the structural demand for these items. A negative terms-of-trade shock should hurt commodity currencies such as AUD, NZD, and CAD. Further, from a currency valuation perspective, the risk of a correction in these currencies is real. Our fair value range is 0.61–0.69 for AUD/USD and 1.27–1.43 for USD/CAD, depending on the valuation metric. AUD/USD is already protruding from the top of its fair value range. At the same time, the CAD is now overvalued according to eight of our 12 valuation specifications. Lingering in over-valued territory should help push these currencies lower against the structural USD correction.
