China's Currency

According to this article by Michael Pettis, China is suffering from "unprecedented hot money inflows." Michael calculates the growth in foreign currency reserves at $75 billion for April. If this is correct, that translates into a 50%+ annual growth rate for China's $1.75 Trillion reserve.

I believe that China will have to float the Yuan. Sooner or later, raw material costs will start to crimp profits faster than an appreciating currency would. Also, I believe that the Sichuan earthquake will have an effect similar to Hurricane Katrina in the US: prices will skyrocket! However, the government has made the earthquake the top priority, and will probably initiate even more price controls, so it will take some time for the pressure in the system to dissipate.

Europe is another piece in this puzzle. The Eurozone is just as big a customer for China as the US. While the Yuan has appreciated against the dollar, it's still falling against the Euro. I believe that China will allow the Yuan to appreciate more to keep up with the Euro, or at least split the difference between the Euro and the Dollar.

Bottom line: time to buy more CNY.