China Letting the Yuan Appreciate Will Have an Impact on Commercial Real Estate

China’s decision to let the Yuan appreciate is a drain on global liquidity. While various legislative elements and the treasury have aggressively pushed China to revalue the Yuan, the Federal reserve has indicated that rates will stay low for a while. Unfortunately these policy goals are at odds and it leads to some confusion in the market place.

What does this have to do with commercial real estate? China first revalued it’s currency on July 21, 2005. The high in Toll Brothers (TOL) stock: $55/share the week of July 22, 2005. It’s around $17 while I’m writing this.

Certainly, two data points are not a scientific evaluation. There are some more, however. NVR and PHM also enjoyed their all-time highs in the summer of 2005. Still not scientific, but perhaps worth a look? I would say so, given how important the US housing market is to the global economy.

As we’ve discussed before, China maintains the peg buy purchasing USD. Those USD go directly into US assets, most treasuries and agencies. By letting the yuan appreciate, China will be buying fewer USD and, therefore, few US treasuries and agencies. Effectively, if there were two huge printing presses in operation (the FED and the PBOC), one has slowed production.

If you buy my implicit argument that the yuan re-val contributed to the decline in the US housing market back in 2005, what is going to happen this time? Tough to say, given how far asset prices have moved since then. We can note, however, that back in July 2005, the US unemployment rate was about 5.2% vs. about 9.3% in May 2010. We are also, as you may remember, in the middle of a sovereign debt crisis in Europe. Is this really the best time for US officials to press China on revaluing the Yuan?

When I read today’s Fed statement, I don’t get the feeling that less liquidity is what’s required.