3 years ago
Article by Clifford Bennett regarding the Chinese YUAN
China ‘Virtually Floats’ the Yuan
12 August, 2015
The PBOC truly surprised the market yesterday and just when the skies were, as I like to say, clearing.
While the market reaction has been far too extreme, and most of the immediate commentaries such as this being bad for commodity prices completely lacking any sense at all, the reality is that this is an extremely bold and tremendous leap forward for China.
China takes another Great Step.
The ‘great step of China’ perhaps?
As outlined below, the trade data released over the weekend was by no means as bad as people are making it out to be. It was in fact another in a series of improving months since China trade did take a hit at the start of the year, but this is not the main driver of the decision to ‘virtually’ float the Yuan. The real driver is the over-whelming number one ego aspect of having the second largest and fastest growing major economy in the world.
To be recognised as another reserve currency alongside the US dollar and the Euro.
May I humbly suggest I was one of the very first people in the world to push the idea that we were headed toward three equal reserve currencies. I know this because of all of the derision and criticism I copped several years ago for suggesting it. Having made this suggestion, that we would soon have three equal super-powers, the USA, EU, and China, many times at Eurofinance conferences around the world the big call was when I pushed this at the APEC Summit in Russia in 2012. My comments have bizarrely since been attributed to the Chairman of the second largest bank in Russia in the official records, but things like that happen in Russia!
This was when President Putin in his closing speech said he was unhappy with that ‘currency guy’? If you ever want to feel uncomfortable for a moment, try sitting in an auditorium in Vladivostok with Putin appearing to be angry with you? He quickly smiled and said he thought I was wrong because I had only suggested three reserve currencies. He of course said there would be four. The Rouble?
It has been abundantly clear for many years that this was where the world would end up. That the Yuan would become a global reserve currency. I am quite peeved that some American economist partially quoting me, and my ideas, but attributing them to someone else, has been on a rampage of e-mail advertising lately pushing all of this as some form of catastrophe or evil plot by the Chinese. This guy is wrong on every point. There being three equal reserve currencies will take the pressure off the USA and allow its exports to continue to be very competitive in the global marketplace we now all live in. To think anything else is to believe nothing has changed. It also helps to bring in what I have been calling the century of ‘peace’. There will be conflicts, but more contained regional conflicts. Just as we are seeing.
Most of all though, this shift in currency weights is just a recognition of the rise of China and the European Union as well. In a general sense if you like, the pack is catching up to the long time leader. It is not the case of American demise. Quite the contrary. The USA will continue to benefit strongly from this new era of globalisation.
So the rise of the Yuan as a reserve currency is a stand out POSITIVE, reflecting as it does this great new prosperity age we are now all living in. If you think things are tough now on a global level trying going back just a decade or two. A far greater proportion of people lived in isolation, poverty, and without the freedom or capability to aspire to better lives than do now. Tremendously so. This is indeed a prosperous age and that is why corporate earnings are through the roof as are profits.
Coming back to the news that the Yuan was depreciated 1.9%. It was not just depreciated by 1.9%. This was accompanied by an announcement that from now on the previous day’s close would be taken into account at the next day’s fixing. As will the movement of other major currencies.
This means the Yuan can virtually freely trend!
THIS IS WHAT IS HUGE. It is a virtual free float, and certainly only one last step away now from a truly free floating currency!
Why did it happen this week? Well not because of the trade data I can assure you. There is no panic about the trade data, though of course there would be concern.
This is all about the IMF being in China last week and having serious discussions about, but not yet willing, to accord the Yuan the title of Reserve Currency.
For that the Yuan has to be free floating. This is why today’s announcement occurred.
Yes, it will help China’s exports and go some way to off-setting the increasing trade disadvantage visa vie other Asian competitors, China was experiencing by having such a severe peg to the US dollar.
The Long March to Capitalism
China has come a long way. This is one of those historically important steps in the long march to capitalism. Today’s announcement is extremely bullish for the regional and global economy, bringing into play as it does, natural forces of supply and demand in setting the currency’s level.
China is again to be applauded for its efforts in becoming a true and transparent member of the global economic community.
This was certainly not just a 1.9% devaluation. It was so much more.
The mainstream knee-jerk response of various media heads has been absurd in one regard. The idea that this will dampen demand for commodities. How could a 1.9% devaluation materially change the demand for commodities that have in many cases fallen over 50%? Just a ridiculous clutching at straws nonsense idea. The other negative spin was that this would lead to currency wars. Quite the contrary again as other Asian nations will recognise such risk and refrain from any action along those lines. All will want to avoid precisely that and in any case they are so far ahead due to the peg being place over recent months, that they are hardly going to create an issue over it.
China will be a more balanced economy as a result of the ‘virtual float’, and this will benefit all in the region.
As for the selling of stock markets on this news. This is truly laughable. The negative spin may gather some momentum for a day or two, but the truth is this is a great positive.
Buying the dip comes to mind as an intelligent response to this development.