China & the Dollar

China-Yuan-Currency

QUESTION: Mr. Armstrong; It is true that China will stop supporting the dollar and will become a net seller? The Goldbugs are claiming the dollar is dead buy gold. But they seem to use every reason to justify only buying and it rarely proves to be true. If there’s anyone who knows what is really going on behind the curtain it is most certainly you. Is this for real?

Thanks so much for everything you do.

RKB

ANSWER: Sorry. The answer is no. China will stop accumulating dollars and begin to apply its earnings more directly into its domestic economy. It is not in their interest to  “sell” the dollar or stop “supporting” the dollar as this is being portrayed. Their reserves at $3.6 trillion and they cannot buy much of anything except dollars because that money is kept in bonds not raw cash. They can’t buy euro bonds of most countries. They cannot buy Japanese. So they have few options.

This is part of their reform process – not an act to undermine the dollar that would hurt their economy by reducing their sales to the USA. The central bank under Zhou Xiaochuan has consistently flagged its intention to liberalize financial markets and allow the yuan to trade more freely. Zhou has suggested urgency in pushing for change, although he has not provided any specific timetable. He promised on Saturday to “pull out all stops to deepen financial sector reforms”. The People’s Bank of China (PBOC) will widen the trading band of the yuan in the near term.

The government announced a 60-point reform plan and its leaders pledged to let markets play a “decisive” role in the economy as they unveiled a reform agenda for the next decade. China intends to achieve “decisive results” in its reform push by 2020.

 

We must keep in mind that in Asia, the government actually looks at the economy more like a business than something to manipulate society as in the West. They are concerned about the health of the economy and moving forward where in the US and Europe it is all about trying to retain political power. This is a HUGE difference.

The People’s Bank of China said the country does not benefit any more from increases in its foreign-currency holdings. This reflects the willingness to now address its domestic economy. I have been stating that China must turn inside and develop its own consumer based economy and that is precisely what it is doing. This is fundamental if China is to become the Financial Capital of the World. Only that will displace the USA from that position.

Yuan-Y

The reduction in the dollar purchases will allow the yuan’s appreciation. This was precisely what we have been forecasting. The dollar will decline against the yuan. They cannot hold the yuan down any longer. With talk of rates also going negative, the central bank stated “It’s no longer in China’s favor to accumulate foreign-exchange reserves.”

The monetary authority will effectively end its normal intervention in the currency market and broaden the yuan’s daily trading range, China’s foreign-exchange reserves surged $166 billion in the third quarter to a record $3.66 trillion, more than triple those of any other country and bigger than the gross domestic product of Germany,

The increase in capital inflows has highlighted that money simply poured into the nation’s assets yet it withdrew from developing nations such as Brazil and India. The yuan’s appreciation benefits more people in China than it hurts and instead of Japanese tourists dominating the various sights it is now Chinese.

The central bank has no choice but to widen the yuan’s trading band for the trend in in its favor as we forecast last year. The yuan’s spot rate is allowed to diverge a maximum 1 percent on either side of a daily reference rate set by the People’s Bank of China. The trading range was doubled in April 2012, after being expanded from 0.3 percent in May 2007. The band could be widened to 2 percent,

Capital inflows into China accelerated in October, official data suggest. Yuan positions at the nation’s financial institutions accumulated from foreign-exchange purchases, a gauge of capital flows, climbed 441.6 billion yuan ($72 billion), the most since January. About half of October’s increase in the positions was attributable to surpluses in trade and foreign direct investment, with the rest accounted for by inflows of the more common hot money,

The yuan has appreciated 2.3 percent against the dollar this year, which has been its best-performance of all the emerging-market currencies. This is also in part caused by the Eurozone crisis leaving little choice for investment in that region.

China’s growth in reserves has been focused in U.S. government debt, which gave them a large leverage in the Syrian Crisis. China is the largest foreign creditor to the U.S. and its holdings of Treasuries increased by $25.7 billion, or 2 percent, to $1.294 trillion in September making it the biggest gain since last February.