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July 03, 2009

"Currency movements to dictate endgame of global market turmoil"

Manish Chokhani of Enam Securities says in an interview to CNBC-TV 18 that China's actions on its currency will dictate the end game of the current global stock market turmoil.
..it is Japan, China and the oil countries which fund the US. The US currency is not something that someone is wanting to accept longer-term. At the same time while the oil producing countries can adjust their oil prices up and thereby get away with things, Japan doesn’t have that choice, so be it. Therefore the fulcrum of this trade is going to be what the Chinese do. And China to my mind has no business longer-term not allowing its currency to float because you are running the largest hire purchase scheme in the world, you are lending to someone in a currency in which is going to be worthless by the time you get eventually repaid. And you become fairly rich as an economy, you don’t need to be that dependent on exports and you want your population to start consuming more..and you have built up a fairly good infrastructure. So I would not be very surprised if the mechanism through which this whole thing plays out is an eventual float of the Chinese currency and that then becomes also a reserved currency in the world of some manner and the world fragments then between the Dollar, Euro, Yen and Yuan. That causes a gush into markets of the emerging markets nature but led by China.

...how do all these losses in the US get transmitted out, if the dollar doesn’t fall, you are transmitting it out to the savers who are holding the bonds and 50% of US bonds are held by foreigners including the Japanese and the Chinese and the Middle East countries. No one is so foolish to realize longer term this is a game which has to end and you cannot be printing USD 1-2 trillion of fresh currency every year without spooking someone.

..(this might make the Chinese think one day) we don’t need to continue exporting. In any case the trade balance with the US is shrinking because they are importing less. So we are not gaining by this hire purchase scheme anymore and all the IOUs which we are sitting on are actually getting worthless by the day. It maybe in our best interest because we have a current account surplus, we have a budget surplus, the currency is fairly stable and if we float it, it may just accelerate our growth in the world. So my bet is that that is how things will play out longer-term...Directionally that is where the market is heading.

Arun Natarajan is the Founder & CEO of Venture Intelligence, the leading provider of data and analysis on private equity, venture capital and M&A deals in India. View free samples of Venture Intelligence newsletters and reports. Email the author at arun@ventureintelligence.in