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China Declares Currency Independence

TaiShang

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China Declares Currency Independence
Yuan devaluation is part of a shift away from the dollar bloc that has dominated Asia since World War II.


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Aug. 14, 2015 6:51 p.m. ET, WSJ

On Tuesday China stopped supporting the yuan’s tight link to the strong dollar, allowing its currency to weaken by 3% through Friday. That’s not large by foreign-exchange standards—Japan’s yen has fallen by 35% since 2012. Yet the yuan devaluation unsettled global financial markets that are worried about weak global growth and deflation pressures.

The depreciation of the yuan follows the spectacular boom and bust in China’s stock market: The Shanghai index, up 60% year-to-date at its June 12 peak and is now up only 23%. The two shocks gave new life, probably short-lived, to decade-long predictions of a China hard landing. Some in Washington may interpret Beijing’s latest move as part of a currency war, or an indication of China’s greater ambitions—in the South China Sea, Africa, the global financial system, and toward a yuan bloc through its new Asian Infrastructure Investment Bank (AIIB).

For China, however, the problem was more about the global slowdown and the strengthening dollar. Under current U.S. policies, the dollar has no reliable value—it weakened massively in the 1970s, strengthened in the 1980s and 1990s, weakened in the 2000s, and has been soaring in recent years. This instability makes the dollar an unsuitable long-term link for Beijing and its aspirations for fast economic growth.

Since 1993 China’s leaders have been committed to providing a “strong and stable” yuan throughout the business cycle and, as a result, median income has risen rapidly. That commitment to stability is in marked contrast to the U.S. which lets markets change the value of the dollar based on their perception of economic conditions. This turns often-arbitrary currency trends into a dominant self-reinforcing part of our economic fundamentals, creating momentum-driven boom-bust cycles in the strong-dollar 1990s and the weak-dollar 2000s.

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The risks of devaluing its national currency, the yuan. Plus, Hillary Clinton’s decision to give federal authorities her private computer server and a thumb drive, and the EPAs three million gallon spill of heavy metals into a river.

By opting out of this, China is in effect taking a big step toward currency independence. The yuan’s link to the dollar, whose value has been surging, caused the yuan to rise too high in value to meet Beijing’s goal of price stability, and its goal of fostering commerce with its other trading partners, many of which have devalued. The dollar has been rising against gold and, lately, even against the normally strong Singapore dollar and Swiss franc, so the dollar can’t be considered stable.

China decided that a gradual delinkage from the dollar would help maintain the stability of its own currency. The International Monetary Fund immediately welcomed the new policy of flexibility, which allows the dollar to weaken or strengthen by 2% a day against the yuan. China hopes this float will prepare the yuan to become a reserve currency alongside the dollar, pound, euro and yen, which has been one of China’s highest economic priorities.

Those who are bearish on China keep asserting that China is acting out of panic or weakness. Not so: Beijing is methodically pursuing financial liberalization while responding to the external problems of slower global growth, excessive dollar strength, and the reverberations in China from the U.S. Federal Reserve’s inexplicable policy of setting interest rates near zero six years after the recession. China’s move is another step in the gradual shift away from the dollar bloc and U.S. economic leadership that dominated Asia since World War II. China hopes to replace this with an anchor to the yuan, and China-based institutions like the AIIB.

It remains to be seen whether Beijing’s change in currency policy will provide any near-term boost to the country’s economic slowdown. Monetary conditions in the global economy are bordering on deflation, and China’s move won’t help with that. The yuan devaluation already seems to have worsened the plunge in commodity indexes. Pressure on dollar debtors both in China and elsewhere will increase as China’s devaluation puts downward pressure on dollar prices world-wide.

The magnitude of dollar and yuan strength is reflected in gold’s recent price break below its 10-year average. That’s the same deflation signal that preceded the disastrous Asian devaluation crisis of 1997-98, during which world dollar GDP and corporate earnings shrank as they are doing now.

Asia is in a better position this time to withstand an open-ended strong-dollar policy because less of its private and public debt is denominated in dollars. But the world monetary system is in a worse position.

Central banks in the U.S., Japan and Europe already have used their preferred tools, expanding balance sheets and setting interest rates near zero. Despite that (because of it, in my view), growth remains anemic and inflation in the U.S., rather than moving toward the Federal Reserve’s 2% target, is likely to turn negative given the latest plunge in oil and gasoline prices.

Yet there’s no plan to change the Fed’s top-down, market-distorting misallocation of credit as the first interest-rate hike approaches. This is one factor in China’s decision to create distance between the yuan and the dollar.

Making matters worse for global growth, the reliance on monetary policy has diverted attention from the urgent need for structural reforms in the developed countries, including Europe’s antigrowth labor, tax and spending policies, and the byzantine U.S. tax code and escalating federal regulatory chokehold.

The result has been a huge downgrade in global GDP that adds to China’s economic slowdown. A year ago the IMF looked for a world gross domestic product of $81.6 trillion in 2015. The IMF lowered its projection to $74.6 trillion in April. It’s likely the IMF’s projection will fall below $72 trillion in its October update, to take into account China’s devaluation and the spreading recessions in many emerging markets.

China may have loosened its tie to the unstable dollar, but this won’t suddenly stop the slide in its exports that is the result of the global slowdown. Nor can exchange-rate policy cause businesses to invest more effectively or consumers to open their pocket books.
 
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Currency War: China Attacks the Dollar – German Newspaper

21:12 14.08.2015

The yuan’s devaluation by China is nothing more than an explicit warning to the United States, DWN wrote.


China's devaluation of the yuan could negatively affect the United States. This move by China’s authorities has caused uncertainty among US policymakers who have frequently blamed China for manipulating its national currency for a trade advantage.

A weaker yuan will increase the competitiveness of Chinese exports and might cause complaints among US manufacturers, media wrote.

China's Export-Boosting Yuan Devaluation Will Continue

China is seeking to establish its currency as an alternative currency to the US dollar in the international trade. In the future, its exports and imports are expected to be carried out not in dollars, but in the national currency.

According to DWN, China’s move is a clear sign that the country will ruthlessly enforce the interests of its export industries. It is an explicit warning to the US that it can no longer be responsible for pursuing a monetary policy independent from other states and should take into account their interests.

The US central bank has long been preparing to raise US interest rates. This step is considered logical by many financial experts, but could have a significant effect on other countries and their currencies. This especially applies to exporters of raw materials, the prices of which would significantly react to the interest rate changes.

By devaluing its currency, Beijing demonstrates its unwillingness to accept the US rates’ increase, according to DWN. Should the interest rates rise further, China will oppose it and devaluate its currency against the dollar even further.



Read more: Currency War: China Attacks the Dollar – German Newspaper / Sputnik International
 
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By making the Yuan market-oriented, the peg to the dollar is eliminated. This means China won't have to intervene in the foreign exchange market to keep the dollar-yuan peg at a certain level.

Previously, China bought dollars and sold yuan to keep the peg at a stable level. These dollars accumulated and became part of China's forex reserves. These dollars in turn were used to buy US treasury bonds.

Now, the dollar got stronger due to global economic weakness and resulted in the PBOC having to sell dollars to keep the peg as the yuan got weaker due to dollar strength. China don't want to waste its forex reserves to keep the peg and decided to let the yuan be market-oriented. China had no choice but to let the dollar-yuan peg go. If China had kept the peg, China would have had to use billions of dollars from its forex reserves to keep the peg in tact.

So in summary, in the past China bought dollars and sold yuan to keep the peg. Now China had to sell dollars and buy yuan to keep the peg. What happened was that the cost of keeping the peg was far too great. China sold $300 billion from its forex reserves to keep the peg. That's $300 billion wasted on keeping a stupid peg. Now that the yuan is market-determined, China won't be buying as many dollars as before and therefore won't be buying US treasury bonds as before.
 
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Only a country with immense power can make such bold moves, bravo China. :china:
rofl ok, by that logic many countries, including Indonesia and New Zealand are mightier than China.
 
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China devalued its currency because its exports are falling...again the positive effect of devaluation will show if Chinese exports are falling due to weak demand from the west, and not if Chinese exporters are loosing competitive advantage to other countries.

And this devaluation has nothing to do with Chinese plan to shift away from the dollar bloc
 
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China advances exchange rate reform, a credit positive
August 16, 2015

China's new forex rate formation mechanism is credit positive as it will increase currency flexibility and support China's capital account liberalization, said Moody's in a recent report.

The People's Bank of China on Tuesday adjusted the exchange rate formation system to close the gap between a lower central parity rate and market expectations.

The market reacted with surprise and the falling yuan led to a heavy sell-off, declines in Asian stocks and falls bulk commodity prices, as well as claims that the depreciation was engineered to support exports.

"The most significant credit implication of this policy shift is that it constitutes progress along the path towards capital account liberalization," said Moody's.

The report noted that there could be further downward pressure this year, but another sharp depreciation is unlikely.

According to Moody's, there are a number of fundamental factors that should support the exchange rate, including a sizable current account surplus, and an estimated $3.7 trillion in official foreign exchange reserves.

Moreover, the Chinese economy's net international assets are equivalent to 17 percent of GDP, and allow it to withstand some amount of exchange rate volatility, said the report.


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He's an Indian. He only listen to what the Western bitches said. lol

They often do not need knowledge to have an opinion. It just comes out naturally.
 
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