I could’ve sworn that the Chinese often put down 30-50% of the property when they purchase. So part of me thinks this MS report was done more as a scare-tactic to get the Chinese central bank to loosen monetary policy and get the stock market going northward again.

Its not clear whether a weaker Yuan would result in more dollar recycling.

Dollar flows to China are comprised of the trade surplus, FDI, interest-rate driven carry trade, and speculation on a Yuan reval. Brad Setser has highlighted the recent importance of “hot money” flows. These are presumably driven by the carry trade and reval speculation.

With the new weak Yuan policy, the reval possibility is out the window. That leaves the rate-driven carry trade, which is now suffering from widespread hedge fund de-levering.

As for the trade surplus, one could argue its more a function of American consumption than the level of the Yuan. As such, its probably on the decline.

Finally, there’s talk in China of a stimulus program. Pumping up domestic demand is one sure fire way of reducing the trade surplus.

Emerging market current account surpluses appear to have reversed course and are now falling or poised to fall at the same time that the U.S. needs external financing for rising budget deficits. Maybe this will be the final straw that breaks the Bretton Woods II camel.