Posted by: michaeldavidpower | November 19, 2009

A canard about the cost of revaluation to China

One of the most oft cited reasons why China might be unwilling to revalue the renminbi is that this would mean losses on their FX  holdings and especially the 70% held in US Dollars.

It would mean losses, and perhaps China’s accounting rules would force their immediate recognition.

But what about all the RMB assets that would gain in value in the wake of this move? Should not these gains be set against those FX losses? And would not these gains in time exceed those losses?

When Japan revalued the Yen throughout the 70s, 80s and 90s, this eventually-win-more-than-you-lose scenario played out. Japan’s mistake was to allow the yen’s revaluation to go too high, too quickly, especially after the Plaza Accord of 1985.

My forecast? China will begin to revalue the RMB again in early 2010, albeit at a snail’s pace. Why only a snail’s pace? They have read and understood the recent history of Japan!

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