Why New China Flexibility of the Yuan Will Not Mean its Appreciation, Nor Gold's Fall

By: Julian_DW_Phillips

With China dropping the 'peg' to the U.S. $, the financial world is expecting it to appreciate up to 30% over time. But we don't expect this at all. China has interests and will do no-one favors unless they are in China's interests. There are some who say it is in China's interests as they may well need to cap rising inflation or cheapen imports. More expensive Chinese exports can still effectively penetrate world markets? But China is a very different economy to any in the West and economic rules that apply to the West have to be modified in the East. So, what will happen to the Yuan now?"

What was said by China?

A narrowing balance-of-payments gap indicates that there's no basis for "large-scale appreciation" by the Yuan, the Chinese central bank said. The Chinese version said no "large-scale volatility [Continued emphasis would be placed to reflecting market supply and demand with reference to a basket of currencies]. It ruled out a one-time revaluation, saying there is no basis for "large-scale appreciation," and kept the Yuan's 0.5% daily trading band unchanged. Today it moved from last weeks Y6.8160 to Y6.7980 as a reaction to the news and the latest Yuan daily fix by the central bank. Why? "The recovery and upturn of the Chinese economy has become more solid with the enhanced economic stability," the People's Bank of China said [[China's inflation rate jumped to a 19-month high of 3.1% in May. China's overseas sales jumped 48.5% in May from a year earlier]. "It is desirable to proceed further with reform of the Yuan exchange-rate regime and increase the Yuan exchange-rate flexibility. Chinese companies will have time to adapt to Yuan changes and the bank reaffirmed a government policy of "gradualism" in exchange-rate reform. Increased Yuan flexibility and "two-way movements" by the currency will aid management of the economy".

There is very little here to suggest a big appreciation. But there is a great deal here to suggest a nearby move in the internationalization of the Yuan! The scope of conjecture that comes out of such a statement could point to many avenues of development, but all point to the arrival of the Yuan on the international scene.

Why no appreciation

The benefits, as argued in the media, could be beneficial, for sure. But all tend to look to the benefits that the States and other countries would enjoy, as a reason for such opinions. Now stand in Beijing and place yourself as head of potentially an economy equal to that of Europe and Asia put together. You have the potential for huge unrest inside this burgeoning economy as the poor 'have not' look at the new 'haves' and want some of the action. This is a fear of central government and one that they are acting on. They want development to spread right across China. They will harness all facets of their country to achieve these objectives. They do have considerably more power to reach this gold than any other government on earth. So when they say that they, "it is desirable to proceed further with reform of the Yuan exchange rate regime and increase the Yuan exchange rate flexibility...." We believe that there is far more to this than simply releasing the exchange rate. The pressure from the U.S. on the exchange rate will perhaps accelerate the process of internationalization of the Yuan, but with it should come with a lot of downward pressure on the Yuan.

Where will the Gold Price, in the Yuan, go now?

Having said all the above, we have to ask you if you expect the Chinese government to promote gold so strongly to its citizens, then knowingly engineer a fall in the Yuan price of gold?....

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By Julian D. W. Phillips
Gold-Authentic Money

Copyright 2009 Authentic Money. All Rights Reserved.
Julian Phillips - was receiving his qualifications to join the London Stock Exchange. He was already deeply immersed in the currency turmoil engulfing world in 1970 and the Institutional Gold Markets, and writing for magazines such as "Accountancy" and the "International Currency Review" He still writes for the ICR.

What is Gold-Authentic Money all about ? Our business is GOLD! Whether it be trends, charts, reports or other factors that have bearing on the price of gold, our aim is to enable you to understand and profit from the Gold Market.

Disclaimer - This document is not and should not be construed as an offer to sell or the solicitation of an offer to purchase or subscribe for any investment. Gold-Authentic Money / Julian D. W. Phillips, have based this document on information obtained from sources it believes to be reliable but which it has not independently verified; Gold-Authentic Money / Julian D. W. Phillips make no guarantee, representation or warranty and accepts no responsibility or liability as to its accuracy or completeness. Expressions of opinion are those of Gold-Authentic Money / Julian D. W. Phillips only and are subject to change without notice.

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