|`Comrade' Faber Says China Will Save the Dollar: Andy Mukherjee|
Sept. 21 (Bloomberg) -- Marc Faber, the Hong Kong-based asset manager who cheerfully wears such gloomy monikers as ``Dr. Doom'' and ``the bear's bear,'' used an unusual ploy to make his point at CLSA Ltd.'s annual investor forum last week.
``I'm Comrade Faber, comrades,'' he began. ``You are now all members of the central committee of the Communist Party that's getting together today for the first time in a year.''
Faber's gambit was timely, as it coincided with a real meeting of the Chinese Communist Party's central committee in Beijing. Although the actual plenary session focused on political transition, with former President Jiang Zemin handing over control of the military to current President Hu Jintao, Faber's make- believe meeting concerned itself with another changeover -- a shift in the world's economic core from the U.S. to China.
An Asian century, with the most-populous nation at its center, is hardly a novel idea. Still, what made Faber's take on the topic interesting was that, unlike many other commentators, Faber's scenario doesn't envision a sell-off in U.S. securities as a starting point for the transition.
In fact, Faber, the managing director of Marc Faber Ltd., and the author of a monthly newsletter called ``The Gloom, Boom and Doom Report,'' argues that Beijing may adopt just the opposite strategy. ``My plan,'' Faber said at the CLSA conference, continuing with his imitation of an imaginary Chinese official, ``is to keep the U.S. dollar very, very strong.''
Current Account Deficit
Faber's ``plan'' may be a big setback for any hope of an orderly reduction in the U.S. current account deficit, which is the biggest risk to the stability of the global financial system.
``A current account deficit of 5 percent of U.S. gross domestic product cannot be reduced,'' Nouriel Roubini of New York University's Stern School of Business and Brad Setser of Oxford University said in a research paper this month, ``if the fastest growing, most dynamic parts of the world economy continue to maintain exchange rates that suppress domestic consumption by keeping the domestic price of imports high.''
And China, which has since 1995 pegged the yuan at 8.3 to the dollar, holds the key to adjustments. ``The rest of Asia will not adjust,'' the authors conclude, ``if China does not adjust.''
Still, there are two compelling reasons for Beijing to keep the dollar overvalued, Faber said.
First, by propping up the U.S. currency, China, along with the rest of Asia, can make more of U.S. manufacturing and service industries uncompetitive, forcing them to move to Asia.
Second, the People's Bank of China uses a big chunk of its $483 billion of foreign-exchange reserves to buy U.S. assets, helping keep American interest rates low. Continued low rates will keep a ``feel-good factor going in the U.S.,'' Faber said.
``One day disaster will strike, and we we'll lose a lot of money on our bonds and dollar positions,'' said Faber, still play- acting the part of a Chinese official. ``This is a small penalty to pay for the transfer of technology and manufacturing and investments into our country.''
Leave aside issues of morality. Could it be that Faber's ``comrade'' is underestimating the financial burden on China from following a strategy of systematic beggaring of the U.S.?
Burden on China
For any Asian central bank, including the Chinese, ``intervening by purchasing dollars,'' says Barry Eichengreen, an economics professor at University of California at Berkeley, ``means pumping additional credit into the economy, given the limited effectiveness of sterilized intervention.''
Much of the extra credit created by the People's Bank of China is creating an investment bubble. Things have come to such a pass that to drive speculators out of the overheated property markets in Shanghai and Beijing, the central bank may have to raise interest rates -- something it's reluctant to do, out of fear that the move may end up stalling the entire economy.
Thus, the current situation, in which China leads the rest of Asia in propping up the dollar, may be unsustainable, even from the Chinese perspective. And if China desires to have some latitude in developing a monetary policy independent of the U.S. Federal Reserve, it may have no option but to let the yuan trade somewhat more freely against the dollar.
However, Faber's mythical ``comrade'' believes that China will have the power to decide when to cause the demise of the overvalued dollar.
``We'll choose the perfect timing when geopolitical tensions are such that they're very conducive to have an economic crisis in the U.S.,'' said Faber, a former managing director at now-defunct junk-bond firm Drexel Burnham Lambert Inc. ``We'll also suffer, but far less than the Western world.''
Let's hope that China's Communist Party officials, who have assured the world of their intention to move toward a more flexible currency regime, aren't privately thinking like the ``comrade.'' Already, the U.S. current account deficit has created tensions that are ``large enough to crack the system in the next three to four years,'' Roubini and Setser say.
If China delays an exchange-rate adjustment only to dump the dollar later in a single shot, Faber's prognosis of gloom and doom could become a reality.