China Floats the Yuan

Today China allowed the yuan to float. Granted, for now it is small, only a 2% revaluation. But it is sure to increase in the near future. What does this mean for the housing market? Well, as the yuan becomes more valuable relative to the US dollar, Chinese exports become more expensive. This will result in an increase in the CPI "core" rate of inflation in the US which will further inspire Greenspan to increase short term rates. Furthermore, as Americans purchase fewer Chinese-made goods (assuming the yuan becomes more valuable relative to the dollar with time) Chinese profits will be down and will have less money to spend. All in all there is less incentive for China to buy US Treasuries. After all, China "pegged" their currency to the US dollar by buying huge amounts of US dollars. Other Asian countries will almost certainly follow China's lead. This will result in an increase in long-term interest rates which will negatively effect the housing bubble:

"Right now China is one of the biggest buyers of U.S. government bonds, helping keep U.S. interest rates low. But if the yuan rose, the Chinese would probably cut back on their purchases, driving yields on Treasuries and mortgage-backed securities higher."

"Ashraf Laidi, chief currency analyst at MG Financial Group, cited estimates that yields on the benchmark 10-year Treasury note are up to 70 basis points below where they would be without purchases by China and other Asian buyers. There are 100 basis points in 1 percent."

"If China were to suddenly to drop its yuan-dollar peg, that means long-term bond rates could rise as much as a full percentage point, Laidi estimated."

"Just the possibility of a free-floating yuan could drive up long-term rates, said Sung Won Sohn, CEO of Los Angeles-based Korean bank Hanmi Financial. "They don't have to do anything," he said. "If they just say they are going to buy fewer U.S. Treasuries, they can hurt us badly.""

"Even advocates of a free-floating yuan agree it will mean higher rates in the United States."

""Mortgage rates are going to go up, the long bond rate is going to go up," said Maryland's Morici, who has long been calling for China to let the yuan rise. "The only question is what is the precipitating event.""

We'll see.

People don't always get what they want, but they get what they deserve.