The story of the global economy over the past 10 years is that China used an artificially low currency, the yuan, to sell goods to the U.S., which used artificially high liquidity to buy them. The Chinese used their one advantage – pricing – to drive an export-based GDP to double-digit growth. The U.S. was able to ramp up assets due to a low Fed rate and a bountiful printing press.
The upshot of all of this is that China has banked 805 billion in greenbacks. And the U.S. amassed enough debt to shake the foundations of the global financial industry.
Now China is making noise about a supercurrency that moves away from the U.S. dollar. But at the same time it has increased its purchases of U.S. Treasury debt by 50% over last year. The mandarins can talk all they want but they know they can’t start selling dollars or their accumulated wealth will disappear when the value of said dollars is hit with more supply than the market can handle.
The Yuan Peg
A few years ago the U.S., Japan and Europe pressured the Chinese into cutting loose the yuan from its dollar peg and allowing it to float freely. The Chinese compromised and let it deflate about 17% in a controlled manner.
But as you can see from this handy chart published by Sober Realist at Seeking Alpha – the peg is back…
When the credit crisis hit, the Chinese, without announcing anything, simply stopped letting the yuan depreciate.
On one hand the Chinese want to protect the natural advantage of being the low-cost exporter; on the other hand, they want the yuan to be an international currency with all the advantages that entails.
In an effort to ease into the latter, China has made deals with six South Asian trading partners and Brazil to allow trade between the yuan and their local currencies. They’ll also use Hong Kong banks as a clearinghouse.
This is the first step towards an international currency and a looser trading band. If China were to allow the free market to determine the price of the yuan, it would drive direct investment into China as well as push up the yuan and drive down the dollar.
This would make U.S. exports more viable, force China to compete on quality rather than price alone and balance out the current trade inequities. And it’s inevitable.
It is now in the best interest of the U.S. to drive down the value of the dollar by keeping interest rates low and printing money. That’s just what they’re doing…
PowerShares Double U.S. Dollar Index bullish (UUP)
If you think the Chinese are squealing now, wait until the dollar breaks support, and the yuan is forced by its new currency partners to de facto break its peg… Then we’ll really hear some caterwauling from the Middle Kingdom.
Your Lucky Day!
An unprecedented decision just handed you a full year of our revolutionary new advisory service - Currency Profits Trader (valued at $5,000) - absolutely FREE! But you must be among the first to claim your “free slot” today. Reserve your space…
Other Articles Related To This Topic:
