China’s currency moves a little closer to challenging the dollar

(Jim Jubak is on vacation until August 24. During that period I’ll post just once or twice a day on JubakPicks.com. I will resume a full schedule for JubakPicks after August 24.)

The renminbi is coming. The renminbi is coming. At this pace it may take a decade or more, but slow changes in China’s currency policy are paving the way for a challenge to the U.S. dollar.

 Eventually.

 On July 28, Chinese regulators lifted restrictions on the flow of the renminbi in Hong Kong. (For the record, the name of China’s currency is “renminbi” and the name for the units of that currency is “yuan.”)

 Any company in the world can now open a renminbi bank account in Hong Kong and exchange the currency freely. Any kind of company can now receive a renminbi loan. Banks in Hong Kong can now create investment products denominated in the currency.

 This step follows two other moves in June, the first cutting the currency’s peg to the U.S. dollar and the second expanding the program that lets Chinese companies use the renminbi to settle cross-border trades. (All this is playing out against a backdrop of a bad-loan crisis in China’s banking system. For more on that see my post http://jubakpicks.com/2010/07/23/if-china-were-to-have-a-real-estate-bust-what-would-it-look-like/ )

 Of the most recent moves, allowing companies to open renminbi bank accounts is the most important in the short-run. Under the old rules foreign companies that made a renminbi profit in China often found themselves unable to either take the profit home or invest it in China. Now companies will be able to invest their renminbi holdings through accounts in Hong Kong.

 In the long run, though it’s the direction that matters. All the moves in July and June inch the renminbi a little closer to a global currency. As long as holders of yuan can’t move them freely across borders or exchange them for other currencies when and where they please, or settle trades in renminbi, then China’s currency isn’t ready for a global role.

 Beijing hasn’t removed all restrictions on the movement of its currency. Hong Kong banks, for example, can only clear their open renminbi positions with the Bank of China if the transactions are related to trade. The volume of cross-border trade in renminbi up about 20 times in the first half of 2010 over the same period of 2009, but that still amounts to just 70.6 billion yuan (or about $10.4 billion.)

 That’s not enough to make the renminbi a serious global currency now but the momentum points in that direction.

(This post first ran on Jubak Asset Management (Jubakam.com) on July 29.) 

So much for any hopes for quick appreciation in China’s currency

 Day 2 isn’t nearly as positive as Day 1.

A day after the Chinese government announced that it would end its policy of keeping its current strictly pegged to the U.S. dollar, the world is getting an object lesson in exactly how slow any appreciation in the Chinese yuan is going to be.

On June 22 the yuan actually fell by 0.23% against the U.S. dollar.

That’s right. The yuan fell. It actually got cheaper against the dollar. The drop was the biggest since December 2008.

This comes a day after the MSCI Emerging Markets Index climbed 2.6% on confidence that the decision meant that the People’s Bank of China would now allow its currency to appreciate against the dollar. That would, markets bet, help Asia’s other exporters who were losing market share to Chinese exporters as their currencies appreciated against the yuan and the dollar.

I don’t think today’s drop in the yuan signals that after just one day the People’s Bank has abandoned plans to let the yuan gradually appreciate. I think a 3% gain for the currency against the dollar is still a good forecast for 2010.

But the People’s Bank doesn’t want currency speculators racking up profits from that policy. Today’s drop in the yuan is a not so subtle reminder that betting on the drop of the yuan isn’t a one-way, no-lose play.

That it takes some of the enthusiasm out of emerging stock markets is just a side effect.

Companies are sitting on the highest percentage of cash since the 1960s

Want to know why the U.S. economic recovery isn’t producing more jobs?

For part of the explanation, look at where companies are putting their cash. With record levels of cash on company balance sheets U.S. companies aren’t putting it into expanding production, buying new equipment, or building market share.

Instead they’re buying back their own shares or simply leaving the cash sitting on their balance sheets, the Financial Times reports.

So far in 2010, companies have announced 33 new buy backs for $178 billion, according to Bank of America’s Merrill Lynch unit. If buy backs were to continue at the same rate for all of 2010, the total would come to almost $900 billion. That would be the most since 2007.

But that level of buying, high as it is, isn’t enough to soak up all the cash companies are generating. Because companies have cut costs and reduced inventories even as profits have recovered, cash balances have climbed to $1.84 trillion, according to data from the Federal Reserve. (The Fed’s data excludes cash at financial companies.) That puts cash at the highest level as a percentage of assets since the 1960s.

Two things seem to be generating these trends.

The debt world turned upside down: the U.S. cuts the size of its bond sales in May

The Euro Zone’s pain is the U.S. Treasury’s gain.

The yield in for the 10-year U.S. Treasury note is down below 3.5% again thanks to bond buyer’s flight to safety in the euro debt crisis. The drop takes the yield back to where it was in December 2009.

Ordinarily, the United States would be looking at rising interest rates as its economy crawled off a bottom and bond buyers began to anticipate interest rate increases from the Federal Reserve as it took its extra low recession fighting interest rates up toward neutral. Some bond investors would even start to avoid the category completely because of fears that an economic recovery would usher in worries about inflation and higher interest rates from the Fed to head off that possibility.

That’s exactly what was happening in the early part of the year.

But that’s not what’s happening now.

Economists and big bond investors who were looking for the Federal Reserve to begin raising interest rates at the end of 2010 are pushing out their predictions into 2011.

This all produces the kind of virtuous cycle that can drive interests even lower from here.

Brazil raises interest rates as emerging economies step up their fight against inflation

Brazil’s central bank, Banco Central do Brazil, raised interest rates as expected yesterday, April 27.

But the bank also did the unexpected. The increase in the benchmark Selic rate to 9.5% from 8.75% was more than most economists and analysts had expected. 30 of the 54 economists and analysts surveyed by Bloomberg before the increase had projected a 0.5 percentage point move instead of the actual 0.75 percentage point hike.

The interest rate increase is the first by any Latin American bank in more than a year.

In a one sentence statement announcing the decision the central bank didn’t indicate how fast or far interest rate increases would go. But economists say that the bank is likely to raise rates at its next four to six meetings.