Most Popular
1. It’s a New Macro, the Gold Market Knows It, But Dead Men Walking Do Not (yet)- Gary_Tanashian
2.Stock Market Presidential Election Cycle Seasonal Trend Analysis - Nadeem_Walayat
3. Bitcoin S&P Pattern - Nadeem_Walayat
4.Nvidia Blow Off Top - Flying High like the Phoenix too Close to the Sun - Nadeem_Walayat
4.U.S. financial market’s “Weimar phase” impact to your fiat and digital assets - Raymond_Matison
5. How to Profit from the Global Warming ClImate Change Mega Death Trend - Part1 - Nadeem_Walayat
7.Bitcoin Gravy Train Trend Forecast 2024 - - Nadeem_Walayat
8.The Bond Trade and Interest Rates - Nadeem_Walayat
9.It’s Easy to Scream Stocks Bubble! - Stephen_McBride
10.Fed’s Next Intertest Rate Move might not align with popular consensus - Richard_Mills
Last 7 days
Stock Market Brief in Count Down to US Election Result 2024 - 3rd Nov 24
Gold Stocks’ Winter Rally 2024 - 3rd Nov 24
Why Countdown to U.S. Recession is Underway - 3rd Nov 24
Stock Market Trend Forecast to Jan 2025 - 2nd Nov 24
President Donald PUMP Forecast to Win US Presidential Election 2024 - 1st Nov 24
At These Levels, Buying Silver Is Like Getting It At $5 In 2003 - 28th Oct 24
Nvidia Numero Uno Selling Shovels in the AI Gold Rush - 28th Oct 24
The Future of Online Casinos - 28th Oct 24
Panic in the Air As Stock Market Correction Delivers Deep Opps in AI Tech Stocks - 27th Oct 24
Stocks, Bitcoin, Crypto's Counting Down to President Donald Pump! - 27th Oct 24
UK Budget 2024 - What to do Before 30th Oct - Pensions and ISA's - 27th Oct 24
7 Days of Crypto Opportunities Starts NOW - 27th Oct 24
The Power Law in Venture Capital: How Visionary Investors Like Yuri Milner Have Shaped the Future - 27th Oct 24
This Points To Significantly Higher Silver Prices - 27th Oct 24
US House Prices Trend Forecast 2024 to 2026 - 11th Oct 24
US Housing Market Analysis - Immigration Drives House Prices Higher - 30th Sep 24
Stock Market October Correction - 30th Sep 24
The Folly of Tariffs and Trade Wars - 30th Sep 24
Gold: 5 principles to help you stay ahead of price turns - 30th Sep 24
The Everything Rally will Spark multi year Bull Market - 30th Sep 24
US FIXED MORTGAGES LIMITING SUPPLY - 23rd Sep 24
US Housing Market Free Equity - 23rd Sep 24
US Rate Cut FOMO In Stock Market Correction Window - 22nd Sep 24
US State Demographics - 22nd Sep 24
Gold and Silver Shine as the Fed Cuts Rates: What’s Next? - 22nd Sep 24
Stock Market Sentiment Speaks:Nothing Can Topple This Market - 22nd Sep 24
US Population Growth Rate - 17th Sep 24
Are Stocks Overheating? - 17th Sep 24
Sentiment Speaks: Silver Is At A Major Turning Point - 17th Sep 24
If The Stock Market Turn Quickly, How Bad Can Things Get? - 17th Sep 24
IMMIGRATION DRIVES HOUSE PRICES HIGHER - 12th Sep 24
Global Debt Bubble - 12th Sep 24
Gold’s Outlook CPI Data - 12th Sep 24

Market Oracle FREE Newsletter

How to Protect your Wealth by Investing in AI Tech Stocks

Chinese Yuan Remains Suppressed to Support Exporters

Currencies / China Currency Yuan Aug 29, 2008 - 08:23 AM GMT

By: Michael_J_Kosares

Currencies

(USAGOLD) CHINA -- Peter Grant writes: It's been slightly more than three years since China freed the yuan from its peg to the dollar. From the early 1990s until July of 2005, the USD-CNY exchange rate was fixed at 8.27, giving China a distinct and consistent advantage when it came to international trade.

The US was, and continues to be, the major consumer of goods manufactured in China. The artificially weak yuan resulted in the US trade deficit ballooning, while China amassed a monster trade surplus and considerable dollar reserves. In the years leading up to the float of the yuan, China was under considerable political pressure from the west.


Don't get the wrong idea though; the yuan is far from being free to find its proper value based on the fundamentals. The People's Bank of China (PBoC) utilized a tightly managed float system to keep exchange rates from fluctuating too widely. Each business day the PBoC establishes a central parity rate for the yuan based on a basket of currencies. Today's parity rate against the dollar was set at 6.8415. The yuan is only allowed to fluctuate 0.5% on either side of that parity rate.

Since the yuan was de-pegged from the dollar on 21-Jul-05, the currency has appreciated 17% against the dollar. China's growth rate warrants substantially greater currency appreciation. However, a stronger yuan cuts into China's already weakening export business.

While China seeks to spur domestic demand for its goods, it remains extremely reliant on exports as a means of growing the economy and creating jobs. As we discussed in yesterday's report, China is faced with the daunting task of generating 10 million new jobs each year. The PBoC faces rather significant policy and political hurdles to facilitate that goal.

At this point the central bank must keep the yuan suppressed to the point where Chinese manufactured goods are still attractively priced, despite waning demand resulting from a contracting global economy. At the same time, they don't want to risk trade sanctions from their biggest customers in the west who consistently point out that the yuan is undervalued and that their own export markets are suffering.

According to a recent Ambrose Evans-Pritchard article in The Telegraph, the PBoC has found some rather creative ways to manipulate the USD-CNY rate. It seems that Chinese banks are required to hold excess reserves in dollars rather than yuan. Since March, the central government has raised the reserve requirements five times.

Reserve requirements are now 17.5% of total lending. As the banks seek to acquire the mandated reserves it has the effect of lifting the dollar and suppressing the yuan, offering relief to China's softening export market. Meanwhile the firmer dollar makes US goods more expensive for foreign buyers.

US exporters saw some relief in recent months as a result of the sharply weaker dollar, but much of that is being reversed out as the dollar has climbed. Yet there doesn't seem to be much protest from the US regarding China's efforts to weaken the yuan again.

If you would like to broaden your view of gold market news and analysis, please feel welcome to join our free NewsGroup to receive by e-mail periodic gold news alerts, USAGOLD Market Updates, and relevant commentary like these.

This might be explained by the fact that there are political gains to be had. The dollar has firmed significantly in the last month and a half, meanwhile exporters are still reaping the benefits of recent record lows in the dollar. Headlines that can simultaneously tout a firmer dollar and a narrowing trade deficit certainly provide some benefit to the incumbent party.

Look for the trade and exchange rate rhetoric to start up again in earnest after the November election. That's when things could get very interesting. Just be aware that China is going to come to that bargaining table wielding an enormous amount of clout as one of the primary financers of America's massive debt.

The US may ultimately seek to weaken the dollar further to protect gains in exports. However, one can expect China to doggedly defend its exporters as well by continuing to suppress the yuan. To quote another recent excellent article by Mr. Evans-Pritchard: "What we are about to see is a race to the bottom by the world's major currencies as each tries to devalue against others in a beggar-thy-neighbour policy to shore up exports."

Whether that 'race to the bottom' is about to begin, or is already underway, the ones holding the pieces of paper with the colorful pictures are the ones who suffer, not the ones who issue those pieces of paper. Physical gold ownership is your best chance to reach the finish line with at least a portion of your wealth intact. That is why we at USAGOLD strongly believe that gold is a necessary and permanent component in the modern portfolio.

Gold is bedrock.

By Pete Grant is the Senior Metals Analyst and an Account Executive with USAGOLD - Centennial Precious Metals.
USAGOLD - Centennial Precious Metals, Denver

Michael Kosares has over 30 years experience in the gold business, and is the author of The ABCs of Gold Investing: How to Protect and Build Your Wealth with Gold , and numerous magazine and internet articles and essays. He is frequently interviewed in the financial press and is well-known for his on-going commentary on the gold market and its economic, political and financial underpinnings.

Disclaimer: Opinions expressed in commentary e do not constitute an offer to buy or sell, or the solicitation of an offer to buy or sell any precious metals product, nor should they be viewed in any way as investment advice or advice to buy, sell or hold. Centennial Precious Metals, Inc. recommends the purchase of physical precious metals for asset preservation purposes, not speculation. Utilization of these opinions for speculative purposes is neither suggested nor advised. Commentary is strictly for educational purposes, and as such USAGOLD - Centennial Precious Metals does not warrant or guarantee the accuracy, timeliness or completeness of the information found here.

Michael J. Kosares Archive

© 2005-2022 http://www.MarketOracle.co.uk - The Market Oracle is a FREE Daily Financial Markets Analysis & Forecasting online publication.


Post Comment

Only logged in users are allowed to post comments. Register/ Log in