Chinese Yuan (RMB)

Since even before the dawn of the Forex Blog, commentators have been speculating that the US Treasury Department would officially brand China as a "currency manipulator" in its semi-annual report to Congress.  Such a label is important because it would enable the US to levy tariffs and other economic penalties against China.  However, another report has been issued, and one more time the Treasury Department glossed over China’s de facto control over the Yuan. The report did criticize China for failing to appreciate the RMB rapidly enough, since the 12% gains it has racked up over the last two years have been largely offset by inflation.  The report also referred to China’s widening trade surplus and accompanying growth in foreign exchange reserves.  US politicians, however, are less than pleased, and are preparing to take matters into their own hands.  The Associated Press reports:

"In refusing to brand China as a currency manipulator, which is so
obvious, the Administration gives Congress no choice but to act on its
own. This report is the strongest case possible for our legislation,"
said [one high-ranking Senator] Schumer.

Read More: US stops short of accusing China of currency manipulation

Hook

Original post by Jimmy Atkinson and software by Elliott Back

The Organization for Economic Cooperation and Development
(OECD) recently issued a report on the Chinese Yuan, which thoroughly assessed
the currency’s appreciation since it was “revalued” over two years ago.  While the Yuan has technically risen over 10%
against the USD, the OECD concluded that in real terms, the currency has
actually fallen. The official rate of inflation
hit 6.5% this year, and international economists reckon the true figure is
probably much higher. Furthermore, the
government recently revised its estimate for full-year GDP growth to 11.4%,
which means price levels may rise further, eating into the real value of the
RMB.  In fact, the OECD estimates that
the Yuan remains undervalued by as much as 40% and views the “solution” as a
combination of tighter monetary policy and looser exchange rate policy.  The Associated Press reports:

While the report did not directly criticize China’s
foreign exchange controls, it noted that efforts to tighten money supply to
counter inflation were not having much impact.

Read More: OECD Says China Grip on Yuan Too Tight

Original post by Jimmy Atkinson and software by Elliott Back

Despite, or perhaps because of the appreciating Yuan, China’s trade surplus with the US is growing by 50% on an annualized basis, and is set to surpass $250 Billion for the year.  In theory, the more expensive Chinese currency should reduce US dependence on Chinese exports and narrow the trade imbalance.  In practice, the US is actually importing a greater quantity of goods and services from China and is also paying higher prices because of the appreciating Yuan.  Ironically, the US Treasury Secretary is scheduled to discuss this matter with his Chinese counterpart next week, and is expected to pressure China to appreciate the RMB even faster against the Dollar. Unfortunately, China’s hands are partially tied as a result of an agreement it already signed with the EU, under which it promised to appreciate the RMB against the Euro. Bloomberg News reports:

Under the current regime, the yuan is allowed to move as much as 0.5 percent against the U.S. dollar every day, from the previous limit of 0.3 percent. "There will be a broadening of the trading band again in the next few months," said one analyst.

Read More: China Trade Surplus Probably Held Near Record, Fueling Tension

Original post by Jimmy Atkinson and software by Elliott Back

In the campaign to pressure China into revaluing the Yuan, the US has by far been the loudest voice.  However, the rapid decline of the USD may have unintentionally earned the US a new ally in its fight: the EU.  Since the Chinese Yuan is essentially pegged to the USD, and the USD has declined against the Euro, the law of triangular arbitrage is such that the Euro has actually appreciated significantly against the Chinese Yuan.  EU officials are no longer standing by idly, since the exchange rate is beginning to deal serious harm to its balance of trade.  In fact, the EU now occupies third position on the list of countries with the largest trade deficits with China.  Because of the nature of China’s exchange rate regime, however, China’s ability to control the relationship of the Yuan with both the Euro and the USD will be difficult, if not impossible.  The Bangkok Post reports:

Given the fact that about 70% of China’s $1.4 trillion in foreign reserves are dollar-denominated assets and the majority of foreign trade transactions are cleared in US dollars, China has focused more on the RMB-dollar rate.

Read More: A tale of two currencies

Original post by Jimmy Atkinson and software by Elliott Back

In fact, China may have to increase its exposure to the dollar, according to the comments of Brad Setser of the Council of Foreign Relations: "In my mind, so long as China resists more rapid appreciation of the renminbi versus the dollar, it’s rather difficult for China to diversify in any meaningful way against the dollar. If China really started to diversify away from the dollar, I think it’s a big enough player that it would put downward additional pressure on the dollar."

And additional downard pressure on the USD should be what China is trying to avoid. China, being the largest exporter to the U.S. does not want to see appreciation of its currency against the USD, as that would make its goods more expensive (and therefore less competitive) in America.

In fact, Setser goes on to say that in order to prevent the USD from sliding even further downward against the RMB, China would have to not only retain its present stock of USD, but in fact buy even more.

Read more: Can China Dump the Dollar?

Original post by Jimmy Atkinson and software by Elliott Back

A high-ranking official in China’s government recently gave a
speech urging the Central Bank to (continue to) diversify its vast holdings of
foreign exchange, currently estimated at $1.4 Trillion and rising.  The speech was atypical in its level of directness,
as Chinese officials tend to speak with a certain degree of circumspection if
they think there is any possibility that their comments will reach the
public. Specifically, he advocated making
a play on the current volatility in forex markets, by selling “weak currencies”
in favor of “strong currencies.”  In
fact, the most recent data shows that China is already doing just that: its holdings of US government bonds have declined
even as its reserves have risen.  The Financial
Times reports:

Although he later tried to play down his comments, saying he
had not been speaking in an official capacity, the damage was done.

Read More: Dollar sinks to new lows

Original post by Jimmy Atkinson and software by Elliott Back

The Chinese Yuan has crossed the psychological barrier of
7.5 RMB/USD, a level last seen nearly a decade ago.  The currency’s appreciation has been gradual
but visible, not withstanding the cries of western bureaucrats.  By all accounts, the Yuan will continue
rising, though not at the same pace as its trade surplus, which is projected to
jump from $177 Billion in 2006 to $300 Billion in 2007.  Predictions regarding the extent of the
appreciation range from 20% to 400%, the implication being that it depends who
you ask. But the general consensus is
clear: the Yuan is pointing upwards.  Bloomberg
News reports:

Non-deliverable forward contracts show traders are betting
the yuan will reach 7.0070 in 12 months, a gain of 6.9 percent from the spot
rate, and 6.95 by the end of 2008.

Read More: Yuan Gains Past 7.5
for First Time in Decade as Surplus Widens

Original post by Jimmy Atkinson and software by Elliott Back

You have to admire the US for its persistence in pressuring China to appreciate the Yuan,
though it’s not as if anyone seriously expected it to back off. Fresh from the recent
G8 conference and enjoying the spotlight of the media, US Treasury Secretary
Hank Paulson called in China to put its money where its mouth is, and relax its hold on the Yuan. Paulson expressed
dissatisfaction with the pace at which the Chinese currency has appreciated-
approximately 10% since 2005.  He even
insinuated that there would be repercussions for the US-China trade
relationship if this demand was not at least partially fulfilled.  To add insult to injury, he warned that US public opinion of China is already at a low point, in
the wake of the quality control issues with Chinese exports and the subsequent
recalls.  Reuters reports:

“While we are trying to lower barriers to trade, there is a
risk that some in China are
stepping away from long-standing policies of closer global economic integration
– policies which have been a source of

China’s incredible growth.”

Read More: Paulson wants faster China yuan rise

Original post by Jimmy Atkinson and software by Elliott Back

Evidently frustrated by the Euro’s appreciation against the
USD, a group of EU ministers has turned its attention to China, calling
on it to allow the Yuan to appreciate against the Euro.  While the Yuan has appreciated nearly 10%
against the USD over the last two years, it has actually decreased in value
against the Euro.  As a result, the EU
trade deficit has set a fresh record nearly every month. Unfortunately, the Yuan basically remains
pegged to the USD, and since the USD is depreciating faster against the Euro
than against the Chinese Yuan, the law of triangular arbitrage dictates the
Euro must be appreciating against the Yuan.  It appears China’s hands are tied.  Bloomberg News
reports:

“I can assure you China will continue to adopt a
reform oriented policy on its exchange-rate mechanism,” said a Chinese Foreign
Ministry spokesman. “But these
adjustments have to be done gradually and in line with the market.”

Read More: EU Calls on China to Let Yuan Appreciate Against Euro

Original post by Jimmy Atkinson and software by Elliott Back

After much delay, China finally launched the bureau charged with diversifying its $1.4 trillion foreign exchange reserves. The agency will be capitalized with $200 billion and will invest in assets slightly more risky than US treasury securities. Most currency analysts view diversification as tantamount to the sale of dollar-denominated assets, but in practice, this may entail only the movement of funds into riskier dollar-denominated assets. In fact, the investment arm’s opening move was a $3 billion investment in The Blackstone Group, an American financial conglomerate. Dollar bulls can hold off on worrying just yet.

Read More: China’s trillion-dollar kitty is ready

Original post by Jimmy Atkinson and software by Elliott Back

That the balance of trade between the US and China is becoming more and more lopsided in favor of China should come as no surprise to
anyone.  In fact, economists yawned when
the August trade data revealed a 33% jump in the Chinese trade surplus.  As a result, many are beginning to argue that China can allow the Yuan to appreciate at a faster
pace against the Dollar, since it is obvious that China’s export sector will not be materially
affected by a stronger Yuan.  In
addition, China now exports more goods and services to the EU than to America,
yet another statistic which supports the notion that China can allow its
currency to appreciate against the Dollar (the implication here being that the
Euro-Yuan exchange rate should be more important to China at this point).  Finally, China’s inflation rate is now
hovering around 6.5%, its highest level in over a decade.  A more valuable Yuan would presumably make
imports less expensive, thus lowering prices across the board for Chinese
consumers. Bloomberg News reports:

The Chinese currency is selling for about 7.51 to the
dollar. It has risen almost 6 percent against the U.S. currency in the past year while falling more than 3 percent against the euro,
leaving the overall competitiveness of China’s exports little changed.

Read More: Rising Euro Is What China Needs to Dump Dollar

Original post by Jimmy Atkinson and software by Elliott Back

Since it was freed from its fixed exchange rate regime two
years ago, the Chinese Yuan has appreciated nearly 9% against the USD. While the Yuan’s exchange rate is clearly
managed by the Chinese government, many commentators agree that its rise has
given off the aura of a floating currency. One economist thinks China will cement this perception the conclusion of
the Beijing Olympics-to be held in 2008-and allow the currency to float freely,
at which point it could surge by as much as 10% against the USD. Evidently, China is growing tired of the
lack of control it has over its domestic economy due to its exchange rate
policy and is clearly overwhelmed by the need to continue growing its forex reserves
(which now stand at $1.33 trillion) in order to control the Yuan. Bloomberg News reports:

“They have to adopt a free-float system; it’s not a question
of whether they will, but a question of when. After the Olympics, the new
leadership will be firmly in place.”

Read More: Yuan May Trade Freely
After Olympics, UOB’s Suan Says

Original post by Jimmy Atkinson and software by Elliott Back

Earlier this week, the Chinese Yuan recorded its highest one-day increase in value in the two years since it was famously revalued against the Dollar.  The currency rose nearly .4% and prompted renewed speculation that China’s Central Bank will either widen the trading band to .8% or will generally allow the currency to appreciate faster.  In fact, the political and economic consensus continues to maintain that the Yuan is not appreciating rapidly enough.  While it rose over 6% against the Dollar, for example, it actually lost value to several of the world’s major currencies.  Furthermore, its decline against the Dollar is less impressive when China’s skyrocketing inflation rate and burgeoning trade surplus are taken into account.

There are still a few analysts who are bucking the trend and arguing that the Yuan is fairly valued.  This notion is supported by a recent World Bank analysis, which updated its calculation of China’s purchasing power and reduced its PPP-equivalent GDP in the process. However, this opinion is echoed by only a small group of analysts, and an overwhelming majority continues to call for and anticipate a further appreciation of the Yuan.  Bloomberg News reports:

Forward contracts show traders are betting on an 8.7
percent advance in the yuan to 6.7344 per dollar in the next 12
months. The median estimate of 28 analysts surveyed by Bloomberg
News is for a rate of 6.88 by the end of 2008.

Read More: Yuan Rises Most Since End of Peg as China Seeks to Curb Prices

Original post by Jimmy Atkinson and software by Elliott Back

On January 24 last year, the Forex Blog reported with great fanfare that China’s forex reserves had breached the epic milestone of $1 Trillion. [In hindsight, it turns out that the psychologically important barrier was broken several months earlier, but that is beside the point].  Less than one year later, China’s forex reserves reached another important threshold, soaring past $1.5 Trillion. It appears that new reserves are being accumulated at  an exponential rate, having increased $460 Billion last year and over $30 Billion in the month  of December alone. By no coincidence, China’s 2007 trade surplus of $262 Billion shattered the previous record and is expanding at a comparably supersonic pace.

Most analysts reckon that the country is locked in a vicious cycle: when its trade surplus grows, its forex reserves grow proportionately. Moreover, the lopsided trade imbalance th\at China maintains with most of the world ensures that the demand for Chinese Yuan exceeds the supply. In the short run, a more expensive currency equates to higher prices paid for its exports which only increases the trade surplus and forex reserves further, and exerts still more pressure on the currency to appreciate.  Meanwhile, as the Yuan rises, the value of China’s forex reserves, which are denominated predominantly in USD, falls.  What a conundrum indeed! Xinhua News reports:

The value of Chinese RMB against the US dollars has appreciated by over six
percent in 2007. The central parity rate of the RMB was 7.2672 to the
US dollar on Friday.

Read More: Forex reserve tops $1.53 trillion

Original post by Jimmy Atkinson and software by Elliott Back

When Henry Paulson was appointed Secretary of the US Treasury last year, he made China and its purportedly undervalued currency a cornerstone of his economic plan. Lo and behold, several months ago, the Yuan suddenly accelerated in its upward path against the Dollar, rising at an annualized rate of 14%. Currency futures are now pricing in an 8% rise in 2008, while several economists are forecasting a 10% increase.  Ironically, there are still American policymakers who think the Yuan is appreciating too slowly, as well as Chinese policymakers who reckon it is increasing too rapidly.  Accordingly, the current pace probably represents a fair compromise.  Besides, inflation is threatening the US, so a slow appreciation would enable the economy to adjust to higher prices in the long term.  While China also faces rising inflation, it doesn’t want to send investors the message that the movement of its currency is uni-dimensional, which would encourage further inflows of speculative capital.  The Economist reports:

But Chinese policymakers have stressed the need for gradual adjustment.
To show that the currency is not just a one-way bet, the PBOC may try to nudge the yuan a bit lower in coming days.

Read More: Revaluation by stealth

Original post by Jimmy Atkinson and software by Elliott Back

China’s foreign exchange reserves
currently approximate $1.5 Trillion, the majority of which is
denominated in USD.  Moreover, the Central Bank of China earns
interest on every Dollar it adds to its reserves but must also pay
interest on every RMB note that it must issue to offset the Dollars.
Since the Fed began easing monetary policy, the amount of carry (the
difference between what the Central Bank receives on Dollars and pays
on RMB) earned by the Central Bank has completely inverted, such that
it now loses 250 basis points on average for each Dollar exchanged
for RMB. 

Based on the rate at which China is currently accumulating
reserves, this amounts to between $5 Billion and $10 Billion per
month, depending on which method of accounting is utilized.
Furthermore, this trend has been exacerbated because China is
accumulating reserves at a faster rate than its economy is growing.
Some analysts have speculated that this could turn into a major
political issue, with important implications for the RMB/Dollar exchange rate.
The Financial Times reports:

The renminbi has started to appreciate more rapidly in recent
months, rising at an annualised rate of about 20 per cent, compared
with 6-7 per cent over the whole of 2007.  In the longer-term, say
economists, China will have no choice but to allow its currency to
appreciate faster, even in the face of entrenched domestic
resistance.

Read More: Beijing starts to pay for forex ‘sterilisation’

Original post by Jimmy Atkinson and software by Elliott Back

China’s foreign exchange reserves
currently approximate $1.5 Trillion, the majority of which is
denominated in USD.  Moreover, the Central Bank of China earns
interest on every Dollar it adds to its reserves but must also pay
interest on every RMB note that it must issue to offset the Dollars.
Since the Fed began easing monetary policy, the amount of carry (the
difference between what the Central Bank receives on Dollars and pays
on RMB) earned by the Central Bank has completely inverted, such that
it now loses 250 basis points on average for each Dollar exchanged
for RMB. 

Based on the rate at which China is currently accumulating
reserves, this amounts to between $5 Billion and $10 Billion per
month, depending on which method of accounting is utilized.
Furthermore, this trend has been exacerbated because China is
accumulating reserves at a faster rate than its economy is growing.
Some analysts have speculated that this could turn into a major
political issue, with important implications for the RMB/Dollar exchange rate.
The Financial Times reports:

The renminbi has started to appreciate more rapidly in recent
months, rising at an annualised rate of about 20 per cent, compared
with 6-7 per cent over the whole of 2007.  In the longer-term, say
economists, China will have no choice but to allow its currency to
appreciate faster, even in the face of entrenched domestic
resistance.

Read More: Beijing starts to pay for forex ‘sterilisation’

Original post by Jimmy Atkinson and software by Elliott Back

China’s trade surplus grew 22.6% year-over-year for the month of January, on top of export growth of 26.7%.  If there is any silver lining to what many policymakers would consider bad news, it is that growth in imports is slightly outpacing growth in exports.  Unfortunately, that is unlikely to allay the critics, and there are still many of them. The argument remains unchanged- that China is not allowing its currency to rise fast enough.  On paper, however, the Yuan has appreciated by 15% since China officially de-pegged it from the Dollar in July 2005.  In addition, the G7 failed to scold China in its annual meeting, which suggests that economic policymakers are becoming less concerned with China’s forex policy.  Ironically, the revaluation of the Yuan is probably boosting the value of of China’s exports in the short-term, because other countries are now paying more for the same quantity of imports.  AFP reports:

The International Monetary Fund…urged the Chinese
government to loosen the reins on the yuan. "We encourage a
faster pace of appreciation that would be helpful for addressing
China’s key economic challenges and would also contribute to preserving
global economic stability."

Read More: China’s trade surplus rises 22.6 percent in January

Original post by Jimmy Atkinson and software by Elliott Back

Although the Chinese Yuan is ostensibly allowed to fluctuate in value, the reality is that the size of its fluctuations and the pace of its appreciation are tightly controlled by China’s Central Bank.  Since its currency is still effectively fixed to the Dollar, China is severely curtailed in its ability to conduct monetary policy and must closely mirror US policy.  Same goes for the rest of Asia, excluding Japan. While US monetary policy was relatively tight, as it has been for the last five years, this necessity didn’t cause too many problems; most of these economies would have kept interest rates high irrespective of the US.

Since the Fed began loosening monetary policy over the last six months, however, many of the emerging economies in Asia, especially China, have been forced into a bind.  On the one hand, lowering interest rates is exacerbating the problem of inflation.  On the other hand, they want to keep their currencies stable so as not to limit economic growth.  In short, Central Banks must determine which is more important: fighting inflation or promoting growth. According to some economists, these economies are so strong, having grown by nearly 10% collectively last year, that they can afford to slow down, if it will result in greater price stability.  But the only way to stabilize prices is to drastically raise interest rates, which will put even greater pressure on their currencies to appreciate.

In addition, the Central Banks of Asia have amassed a staggering $4 Trillion in foreign exchange reserves.  In the past, this has been a neutral, sometimes profitable activity.  Since the Fed began cutting rates, the interest rate differential has been turned upside-down such that Central Banks are now losing money on each unit of local currency they sell in exchange for Dollars.  According to one analyst, over $160 Billion has been lost since July 2006, and those losses will mount with each additional intervention.

Read More: Fed’s Lower Rates Pressure China to Strengthen Yuan

Original post by Jimmy Atkinson and software by Elliott Back

The lack of fanfare not withstanding, the Chinese Yuan, or RMB, continues to appreciate against the USD. This week, it crossed the psychologically important barrier of 7 RMB/Dollar, a level last seen in the 1990’s. Since its revaluation nearly three years ago, the Yuan has risen 16% against the Dollar, a rate which appears to be growing exponentially given the 4.5% rise already notched in 2008. Due to the Dollar’s continued weakness against all of the major currencies, the RMB has actually fallen against the Euro over the same period. Most analysts reckon the Yuan will continue appreciating, perhaps to 6.5 by year-end. The New York Times reports:

"The appreciating renminbi is a signal the Chinese government is sending to the export companies to switch away from the U.S. and other overseas markets and turn toward the domestic market."

Read More: Yuan Hits Milestone Against Dollar

Original post by Jimmy Atkinson and software by Elliott Back

The anecdotal evidence that China is diversifying its forex exposure
away from the Dollar continues to mount. To date, most of the focus has
centered around the Central Bank of China, which is passively
diversifying its reserves into European and higher-risk assets.
Apparently, Chinese exporters are also getting nervous about the impact
of a falling Dollar on their respective bottom lines. The RMB has risen
11% since the beginning of 2007, which means Chinese companies now
receive 11% less on sales to destinations abroad than they did for
equal-priced goods in 2007. As a result, some companies have taken to
quoting prices in Euros or to adjusting Dollar-denominated prices every
few months. Other companies are building assumptions of a more valuable
RMB into their profit models, and setting prices accordingly. The New
York Times reports:

“We are gradually increasing our emphasis on the domestic market until
we can forget about the export market, because the profit margins on
exports are so thin,” [said one exporter].

Read More: Some Chinese Exporters Prefer Euros to Dollars

Original post by Jimmy Atkinson and software by Elliott Back

In its semiannual report to Congress, the US Treasury Department once again did not cite China as a currency manipulator. For as long as the Forex Blog has been covering this issue, various interest groups have been pressing the Bush administration on this issue, since the label of currency manipulator would entitle Congress to level punitive trade sanctions. The premise of their argument remains that an artificially cheap RMB is responsible for the decline of the US manufacturing sector and the burgeoning trade deficit, which topped $250 Billion in 2007.

The Treasury Department, under the leadership of Henry Paulson, insists
that the best way to handle the situation is through dialog. In its
report, it noted that the RMB has already appreciated over 18% since China’s
government revalued it in 2004. However, with the Presidential election looming, the RMB could become a major political issue. Already, both Hilary Clinton and Barack Obama have announced their intention to co-sponsor a bill that would impose trade sanctions on countries (i.e. China) that are deemed to undervalue their currency. In the end, politicians will continue to whine in vain to appease their constituents, and the RMB will continue climbing at its brisk, current pace of 7% per year.

Read More: US declines to cite China as a currency manipulator

Original post by Jimmy Atkinson and software by Elliott Back

When China’s foreign exchange reserves breached the $1 Trillion mark in November 2006, it was a momentous occasion. Over the following 18 months, however, analysts yawned as the reserves nearly doubled in size. In the month of April, alone, China added an astounding $75 Billion to its stockpile, bringing the total to $1.76 Billion. Analysts attribute this sudden increase to a massive inflow of hot money, as investors seek to profit from both the Yuan’s inevitable appreciation and the widening interest rate spread between China and the US. The Central Bank of China also recently announced the official 2007 trade numbers, which reveal a 49% increase in the country’s current account surplus, to $370 Billion. By no coincidence, this news caused the highest daily appreciation in the Chinese Yuan in more than three months. Bloomberg News reports:

China has allowed a 2.6 percent
gain over the past three months, making it Asia’s best performer
among the 10 most-active currencies in the region outside Japan.

Read More: Yuan Gains Most in 3 Months on Efforts to Curb Trade Surplus and China’s forex reserves hit 1.76 trillion dollars: report

Original post by Jimmy Atkinson and software by Elliott Back

The first half of 2008 has come to a dramatic end, and it’s official: China’s stock market was the world’s worst performer, finishing down 48%. Ironically, some analysts believe this may be a harbinger for a faster appreciation of the Chinese Yuan. While the global credit crisis cannot be completely disentangled from the Chinese macroeconomic picture, certain conclusions can be drawn that are specific to China. In a nutshell, the party may be over. Inflation has surged to a 10-year high, economic growth is slowing, and stocks are facing a prolonged bear market. The Chinese government will likely continue to bide its time so as not to disrupt the Olympics. After the conclusion of the games, however, the Central Bank may begin aggressively hiking rates in order to tame inflation. While this would adversely affect economic growth, it would cause the RMB to appreciate. Forbes reports:

Maybe that’s what Shanghai’s decline is really telling us, that the China miracle may be losing some of its luster, as China tries to make the transition from a low-cost exporter to a leading provider of 21st century goods and services.

Original post by Jimmy Atkinson and software by Elliott Back

In the year-to-date, the Chinese Yuan has already appreciated 6.5% against the USD, the fastest pace since the currency was famously revalued three years ago. This upward pressure has been built largely on the continuing inflow of speculative "hot money," which was itself built on the expectation of further interest rate hikes, ostensibly needed to tame inflation. However, the Central Bank of China recently indicated a slight shift in its monetary policy, backing away from fighting inflation in favor of promoting economic growth. At least until after the Olympic Games conclude, China will henceforth ignore inflation, so as not to precipitate a slowdown that could jeopardize the Games. The Futures markets have been quick to react, and the consensus expectation for 1-year RMB appreciation has fallen from 10% to 5.4%. Bloomberg News reports:

Once the Olympics are out of the way, the vigil on inflation may have to resume.
But unless China gets flooded by speculative flows, a one-shot revaluation will
remain off the table.

Read More: China Won’t Stamp Out Inflation, Revalue Yuan

Original post by Jimmy Atkinson and software by Elliott Back

Yesterday, the Forex Blog reported that Central Banks and Sovereign Wealth Funds appear to be losing confidence in the Dollar. To follow up with a specific example, a high-ranking Chinese policymaker recently suggested that China should move spend some of its reserves since they are rapidly losing value in RMB terms. The official offered that a portion be used to purchase foreign energy assets, in order to mitigate against both the falling Dollar and rising oil. There is clearly a trend among institutional holders of Dollars to use the currency to purchase US assets. Witness the recent (separate) sales of the Chrysler and GM Buildings to Middle Eastern buyers. With nearly $2 Trillion in foreign exchange reserves, however, China is in a class by itself, and any indication of its frustration with the Dollar should be taken very seriously.

Read More: China Considering Using Forex Reserves

Original post by Jimmy Atkinson and software by Elliott Back

As the Chinese Yuan has appreciated over the last three years, and even in the decade leading up to the sudden revaluation, a tremendous amount of speculative "hot money" poured into China. Periodically, the government and Central bank have attempted to stem some of these inflows by creating deliberately unfavorable conditions for foreigners to invest in China. Witness the unnaturally low interest rates and the one-way convertibility of the Chinese Yuan. Now, with inflation running at a 10-year high, the government is becoming more serious in its efforts to clamp down on some of the factors that are driving demand. As a result, it altered its system for governing forex and will increase its oversight over the entities and businesses that import capital into China. If executed properly, much of the upward pressure on prices, and the RMB itself, could be relieved. Reuters reports:

NEW RULES: China operates "a managed float exchange rate
system based on supply and demand".

OLD RULES: China has "a single exchange rate system" with the
central bank announcing the yuan’s value against major
currencies on a daily basis.

Read More: China’s new forex rules

Original post by Jimmy Atkinson and software by Elliott Back

Almost all of the speculation surrounding the Chinese Yuan is aimed at predicting the point at which the currency will stop rising. Will it stop at 6.5? 6? 5? 1? But what if the currency has already peaked, at least temporarily? The Central Bank of China is now openly airing its concerns about a slowing economy, which it believes is more problematic than the country’s surging inflation rate. Accordingly, it will probably relax interest rates and slow the appreciation of the currency, in order to give businesses and exporters the leverage they need to keep the economy going. In fact, the Central Bank already announced a $50 Billion plan to prop up ailing capital and property markets. Such measures are likely to further stoke the fires of inflation, at a time when prices are already rising at the fastest pace in a decade. The futures markets have been quick to take note, and expectations for Yuan appreciation are falling accordingly. Bloomberg News reports:

[Futures contracts] suggest the yuan will reach 6.6060 per dollar in the next 12 months, an advance of 3.8 percent from the current exchange rate. Two weeks ago the contracts, predicted an advance of 5.3 percent. At the start of last month, they priced in a 6 percent rise.

Read More: Dollar Bottom Against Yuan Gets Louder in China Bet

Original post by Jimmy Atkinson and software by Elliott Back