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China removes the USD peg


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Here is an article that seems to have a fully formed and complete explanation of how the RMB peg to the USD has moulded China's economy over the last decade or so, and goes on to predict, unconditionally, that China is headed for a 1920's type depression.


Hmmmm. Anyone who holds out that they have all the answers either are dumb, ignorant or are having a lend so I take this whole article with a grain of salt, particularly when it gets into the USA, USA, USA ending. (Apparently the magazine, The Federalist, is a vehicle for right wing ideologues so what would you expect I suppose).


But as far as the line about the peg undervaluing the RMB up to 2008 and then overvaluing it since then goes then I think the writer of the article is not too far from a reasonable argument. The effect was that the peg flooded China with excess liquidity and now it is sucking that liquidity out. Anyway have a read, but have your salt shaker handy.




FWIW I get the feeling that China will not attempt to shore up the RMB and risk having to fight capital flight (the mere act of fighting capital flight will only encourage more and more to engage in capital flight). As such, I think there is a fair chance that once the national holidays have come (and perhaps gone) Prez Xi will take decisive action.


Anyway one way or another we are (finally) getting to interesting times imo.


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Here is a link to a recent article by Jeffery Sachs in which he argues that China has allowed its currency to become overvalued for the same reason the Japanese allowed the yen to become overvalued post the 1980's: US pressure. His view is that just as the overvalued yen brought on Japan's financial crisis and economic malaise so too will the overvalued yuan negatively impact China's circumstances.




I am aware that Prof Sachs is a leading authority in the area of poverty and third world economics but anytime I have attempted to read any of his stuff I get a similar vibe to reading much of John Pilger's political writings in that no matter what the question is the answer is that the US is at fault. In this case I think the yuan has become overvalued mainly from the actions of the Chinese themselves in response to the 2008 crisis.


At the end of the article he dismisses reasons given by the Economist for China not to devalue the yuan as being "conventional western thinking". I would argue that the reasons given by the Economist are also likely "conventional Chinese thinking". In any case Prof Sachs obviously thinks the Chinese should devalue their currency to avoid the malaise suffered by Japan.


He at no time in the article seems to address the fact that both Japan and China allowed massive credit bubbles to form. My own suspicion is that unless the Chinese find a way to fix that mess then everything else will remain unstable. The Japanese attempted to fix their credit bubble by nationalising private debt rather than take the hit and allow much of that debt to default and here they are 25 years later still with a zombie economy. The Chinese fixed a smaller credit bubble in the late 90's also by nationalising bank debt (and also by allowing banks to pay negative real interest rates on bank deposits) so maybe they will try that approach again this time around (?).


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Another step in Chinas plan to make the yuan a world currency??


Zimbabwe plans to make the Chinese yuan legal tender in a deal that will result in $US40 million ($55 million) of debt being cancelled.


The southern African nation abandoned its own dollar in 2009 after hyperinflation ÃÆâ€â„¢ÃƒÆ’ƒâہ¡ÃƒÆ’‚¢ÃƒÆ’¢Ã¢Ã¢Ã¢Ã¢â€š¬Ã…¡Ãƒâ€šÃ‚¬ÃƒÆ’…¡Ãƒâہ¡ÃƒÆ’‚¬ÃƒÆ’¢Ã¢Ã¢Ã¢Ã¢â‚¬Å¡Ã‚¬Ãƒâ€¦Ã‚¡ÃƒÆ’‚¬Ãƒâہ¡ÃƒÆ’‚ which peaked at around 500 billion per cent ÃÆâ€â„¢ÃƒÆ’ƒâہ¡ÃƒÆ’‚¢ÃƒÆ’¢Ã¢Ã¢Ã¢Ã¢â€š¬Ã…¡Ãƒâ€šÃ‚¬ÃƒÆ’…¡Ãƒâہ¡ÃƒÆ’‚¬ÃƒÆ’¢Ã¢Ã¢Ã¢Ã¢â‚¬Å¡Ã‚¬Ãƒâ€¦Ã‚¡ÃƒÆ’‚¬Ãƒâہ¡ÃƒÆ’‚ rendered it unusable.


It then started using a slew of foreign currencies, including the US dollar and the South African rand.


The yuan was later added, but its use had not been approved yet for public transactions in the market dominated by the US dollar.


Use of the yuan "will be a function of trade between China and Zimbabwe and acceptability with customers in Zimbabwe", the country's Finance Minister Patrick Chinamasa said.


"They (China) said they are cancelling our debts that are maturing this year and we are in the process of finalising the debt instruments and calculating the debts."


Zimbabwe's central bank chief John Mangudya was in negotiations with the People's Bank of China "to see whether we can enhance its usage here", the Minister said.


China is Zimbabwe's biggest trading partner following Zimbabwe's isolation by its former Western trading partners over Harare's human rights record.


In reaction veteran President Robert Mugabe adopted a "look East policy", forging new alliances with eastern Asian countries and buttressing existing ones.


In early December, Chinese President Xi Jinping stopped over in Zimbabwe in a rare trip by a world leader to the country, and presided over the signing of various agreements, mainly to upgrade and rebuild Zimbabwe's infrastructure such as power stations.

Zimbabwe YUAN??


All I can say is good luck to them.

The Mugabe regime will take them for a ride just like they have all the western countries.

Its a bit like invading Afganistan. Every one thinks they can do it where the last country failed.




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I see that for the second time this week the Chinese stocks markets have been shut down for the day by recently installed automatic circuit breakers: if they drop by 5% they stop trading for 15 minutes but if they drop by 7% or more in intraday trading then they are closed down for the rest of the day.


A reason commonly given for Monday's shut-down was to do with all those shares that were suspended from trading back in August when the Chinese stock markets first hit turbulence being able to be traded from this Friday. That suspension has now been extended so that can not be used as an excuse for the time being.


However today's shut-down - which happened fairly early in the trading day - is being explained as a reaction to the authorities setting the RMB for the day at a lower rate than was apparently expected.




I've seen talk that the RMB either needs to be floated by the Chinese authorities or else they do a one-off devaluation against the USD - as much as by 30% - otherwise they are going to be plagued by massive capital outflows (which sooner or later will force them into action anyway).


At the end of last year the Chinese authorities indicated that they were no longer monitoring the RMB against the greenback by itself but rather were using an index of numerous currencies. This gives an answer they are happier with - against the greenback the RMB is increasingly expensive but against the cross rates it is performing okay - but they cannot get away from the grim reality that the USD is the sole benchmark that counts.


Not sure where this goes from here. Does the RMB need to change or is it the USD's position more under threat?



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Global markets are facing a crisis and investors need to be very cautious, says billionaire George Soros. China is struggling to find a new growth model and its currency devaluation is transferring problems to the rest of the world, Soros said in Colombo. A return to positive interest rates is a challenge for the developing world, he said, adding that the current environment has similarities to 2008.


Global currency, stock and commodity markets are under fire in the first week of the new year, with a sinking yuan adding to concern about the strength of China's economy as it shifts away from investment and manufacturing toward consumption and services. Almost $2.5 trillion was wiped from the value of global equities this year through Wednesday, and losses deepened in Asia on Thursday as a plunge in Chinese equities halted trade for the rest of the day.


"China has a major adjustment problem," Soros said. "I would say it amounts to a crisis. When I look at the financial markets there is a serious challenge which reminds me of the crisis we had in 2008."

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thanks AFR or spellcheck


the story is

Each weekday afternoon when her housework is complete, Shanghai grandmother Wu Lindi begins her other life as a black market currency trader.


The 63-year-old retired accountant can be found in the waiting area of a state-owned bank in the city's former French Concession, calculator and cash bundle at the ready.


Despite it being illegal to exchange foreign currency in this manner, Wu is not hiding. Indeed, the security guard at the bank directs us her way when we inquire about purchasing US dollars.


This is China's underground money network in action. It allows the country's capital controls to be circumvented and commerce to continue more freely. But in recent weeks as the turmoil on China's stock markets rolled on, Wu's business has been distinctly one-sided.


"Everyone just wants US dollars," she tells AFR Weekend. "But it's getting harder to find people willing to sell dollars for yuan."


This reluctance to hold yuan is part of a continuing evaporation of confidence in the Chinese unit, as many believe further devaluation is not just inevitable, but Beijing's only way out of the current mess.


That's why the currency, rather than the stock market, is the big story in China this year, as it has the potential to disrupt the fragile economic recovery under way in many parts of the world.




You don't need to be a finance expert to know that something's wrong when an interest rate reaches almost 70 percent. With China's growth outlook darkening and capital flowing out of the country, speculators have been betting heavily against the yuan. The People's Bank of China effectively declared war on them in early January, directing state banks to buy large sums of the currency in Hong Kong to support its value and burn the short sellers.


With the yuan suddenly scarce in Hong Kong, the annualized cost of borrowing it overnight there hit 66.82 percent on Jan. 12ÃÆâ€â„¢ÃƒÆ’ƒâہ¡ÃƒÆ’‚¢ÃƒÆ’¢Ã¢Ã¢Ã¢Ã¢â€š¬Ã…¡Ãƒâ€šÃ‚¬ÃƒÆ’…¡Ãƒâہ¡ÃƒÆ’‚¬ÃƒÆ’¢Ã¢Ã¢Ã¢Ã¢â‚¬Å¡Ã‚¬Ãƒâ€¦Ã‚¡ÃƒÆ’‚¬Ãƒâہ¡ÃƒÆ’‚ÂÂmore than 10 times the usual interest rate. (It receded to 8 percent the next day.) Michael Every, head of financial markets research at Rabobank Group, called the rate spike "murderous" and predicted that things wouldn't end well for Chinese authorities. Central banks "usually win a round like this, but lose in the end," he told Bloomberg.



all going to end in tears?

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More mutterings that it is a near certainty that the Chinese authorities will be forced to devalue the yuan against the greenback by around 20%.




Of course the very fact that just about everyone apparently is now betting on a devaluation means that something else is likely to happen. Using George Soros's theory of reflexivity the Chinese authorities will be doing everything possible to ensure that this outcome, which would enrich all those "viscous" foreign speculators, does not happen.


But at the moment it seems they are standing square on and flat-footed throwing haymakers in the form of billions of dollars to try to repel the attack on the yuan but with little effect. If they are not knocked out before hand, sooner or later they will smarten up and step to the side and throw some punches from unexpected angles. If they start to fight smart, and the probability is that as seasoned street fighters they will, at the end of this bout the yuan will be still standing and the Chinese authorities will be able to claim some sort of points win.


But whatever the outcome for China I suspect that the Australian economy and our currency will have been badly pummeled.



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From The ABC



The Bank of Japan has shocked global markets by driving its official interest rates into negative territory.


In a close run five to four vote, the central bank board moved the official interest rate down a notch from 0 to -0.1 per cent.


In addition, the BoJ will maintain its quantitative easing program, expanding its asset base at a rate of 80 trillion yen ($930 billion) a year through buying up Japanese Government bonds, stakes in real estate trusts and electronically traded funds.


The main Japanese share market index, the Nikkei, initially surged on the news but slumped back into the red afternoon trade, before rising again to be up 2.3 per cent by 4:33pm (AEDT).


The Australian dollar rose nearly 2 per cent against the Yen, while the US dollar was up 0.8 per cent.


IG market analyst Angus Nicholson said the volatile share reaction reflected optimism about increased Japanese export competitiveness versus fears of a new currency war.


"The fact markets pared back this bounce soon after the announcement may in some respects reflect growing market concern that central banks are delving into a tit-for-tat currency devaluation war," he wrote in a note.


"The grand macro-economic elephant in the room is what happens if China is forced into a major one-off devaluation in retaliation.



Just what we need, another escalation in the currency wars. Will this push the Chinese into a massive devaluation??



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so if China were to devalue, as they seem to be doing already, it is for the purpose of selling more of their goods to other countries.


This is turn makes manufacturing in Australia and America and other countries less competitive with China.


does this mean that our money will move further down , or only that it is harder to compete with the YUAN.?





Should Australia be worried?




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