Chinese pegging Yuan to the Dollar

So The Chinese are buying up U.S dollars by the billions by printing Yuan. If they stopped buying the Dollar this will appreciate the Yuan and their dollar holdings will lose a lot of value due to the dollar getting devalued.

I want to discuss how can the chinese break this peg and not suffer great losses? I'm thinking shouldn't the Chinese just buy treasuries of other countries instead and therefore avoid losses when the dollar loses value? The Euro is overvalued so maybe this isn't the best solution, but there must be something better out there.

Mod edit: Good response by UFOinsider below:

Long answer short: they really CAN'T break the peg and not suffer, they'll just shuffle around the issue and take stop gap measures until they explode...because that's how they roll. There's a slim chance of them just restructuring themselves according to the rules of sanity and logic (ie, capitalism + democracy). Hopefully, when the dust settles, they'll have a better social order.
 

China is actively buying up European portfolios: debt, currency, swaps, you name it, and they're trying to associate their currency to that as well. The sad part is that I believe the Euro is very overvalued...not unlike the British pound before Soros' big score, maybe even worse, and I don't think the Chinese fully understand markets when it comes to currency. Europe currently is a net consumer. We are too, but it can be fixed...Europe has simply exhausted their natural resource base. Our currency is more or less going to remain stable, regardless of debt level (we will reign it in) but Europe's will suffer a larger fluctuation, and this could impact the Chinese. The thing to remember with China is that it's a totalitarian regimen, so the value of the yuan inside China is what the government says it is. They will brutally enforce this and will prolong their own misery by doing so until the country either gets MORE autocratic and chokes itself (like N. Korea), or opens up and deals with things constructively (I think it will, and it's just a matter of time).

They're walking a very dangerous line by creating a 'backup' peg to the Euro. On paper, this helps them balance their accounting. In reality, it puts more decision making power into American hands because, well, we run things right now, and freeing us up from financial ties in favor of diplomatic ones lets us make them Europe's problem. In fact, the Euro might actually survive the half baked crap they've come up with these last few weeks, but I think the strain that China will put on them will force a larger correction.

The thing to remember with China is that they have a history of the following: * Importing currency and holding it: they bankrupted the British Empire of silver * Do not see outsiders as worth conquering * Are inwardly focused and aren't very engaged in the world (this is changing) * Are a net producer at the end of the day, and can resort to actual trading vs buying/selling * Political stagnation with periods of upheaval

Net/net, they'll just end up back where they were about five/ten years ago if everything melts down, minus the easy access to foreign capital. The only realistic, long term solution for them is to liberalize and accept free markets. If they try to crack down on the population, I think we'll see a revolution: they've done this TWICE in the last hundred years, so it's entirely within the realm of possible.

SOOOO, that's the high level.

Long answer short: they really CAN'T break the peg and not suffer, they'll just shuffle around the issue and take stop gap measures until they explode...because that's how they roll. There's a slim chance of them just restructuring themselves according to the rules of sanity and logic (ie, capitalism + democracy). Hopefully, when the dust settles, they'll have a better social order.

Sorry for the long answer

Get busy living
 
UFOinsider:
China is actively buying up European portfolios: debt, currency, swaps, you name it, and they're trying to associate their currency to that as well. The sad part is that I believe the Euro is very overvalued...not unlike the British pound before Soros' big score, maybe even worse, and I don't think the Chinese fully understand markets when it comes to currency. Europe currently is a net consumer. We are too, but it can be fixed...Europe has simply exhausted their natural resource base. Our currency is more or less going to remain stable, regardless of debt level (we will reign it in) but Europe's will suffer a larger fluctuation, and this could impact the Chinese. The thing to remember with China is that it's a totalitarian regimen, so the value of the yuan inside China is what the government says it is. They will brutally enforce this and will prolong their own misery by doing so until the country either gets MORE autocratic and chokes itself (like N. Korea), or opens up and deals with things constructively (I think it will, and it's just a matter of time).

They're walking a very dangerous line by creating a 'backup' peg to the Euro. On paper, this helps them balance their accounting. In reality, it puts more decision making power into American hands because, well, we run things right now, and freeing us up from financial ties in favor of diplomatic ones lets us make them Europe's problem. In fact, the Euro might actually survive the half baked crap they've come up with these last few weeks, but I think the strain that China will put on them will force a larger correction.

The thing to remember with China is that they have a history of the following: * Importing currency and holding it: they bankrupted the British Empire of silver * Do not see outsiders as worth conquering * Are inwardly focused and aren't very engaged in the world (this is changing) * Are a net producer at the end of the day, and can resort to actual trading vs buying/selling * Political stagnation with periods of upheaval

Net/net, they'll just end up back where they were about five/ten years ago if everything melts down, minus the easy access to foreign capital. The only realistic, long term solution for them is to liberalize and accept free markets. If they try to crack down on the population, I think we'll see a revolution: they've done this TWICE in the last hundred years, so it's entirely within the realm of possible.

SOOOO, that's the high level.

Long answer short: they really CAN'T break the peg and not suffer, they'll just shuffle around the issue and take stop gap measures until they explode...because that's how they roll. There's a slim chance of them just restructuring themselves according to the rules of sanity and logic (ie, capitalism + democracy). Hopefully, when the dust settles, they'll have a better social order.

Sorry for the long answer

give this man a SB

 

China is holding WAY too many foreign reserves, which is distorting global markets. The dollar peg is part of the problem, but if they were to allow for a freeing up of capital markets and allowed their citizens to actively consume instead of building up huge surpluses that only serve to create larger imbalances in the global economy, we would all be much better off.

I think China still remembers the last Asian financial crisis, and to not repeat it they are simply saving everything they have. The problem is when push comes to shove they will be forced to either open up or, as UFO said, crack down and become increasingly xenophobic and inwardly focused, which would be terrible for the world, US, and Chinese economies.

We are all in this together these days, and reverting to some nationalistic plan to bolster the economy is not only doomed to failure, but is downright immoral.

 
futurectdoc:
The Chinese are taking tentative steps away from the centrally planned economy and towards capitalism, they will float it, it's more a question of when than if.
I'm sincerely hoping for this: the chaos of a 1 BILLION person system crashing won't be pretty. My only question on this point is how to cash in? :)
Get busy living
 

Sorry, I have to disagree. China is more capitalistic than the United States in many ways. Sure, the currency is managed float regime and there is capital control. There are good and bad things about them. As far as I can see, there is no country in the world that follows true capitalism. How much exposure does Chinese have towards Europe? How much exposure does Americans have towards Europe? Only God knows... Let me remind you that European Union is a monetary union with highest GDP in the world. Who doesn't get affected if Europe implode? Who doesn't have a position in Euro, whether it's implicit or explicit.

Lastly, about the peg,

'Long answer short: they really CAN'T break the peg and not suffer, they'll just shuffle around the issue and take stop gap measures until they explode...because that's how they roll. There's a slim chance of them just restructuring themselves according to the rules of sanity and logic (ie, capitalism + democracy). Hopefully, when the dust settles, they'll have a better social order.' - UFOinsider

I don't know what you mean by 'until they explode'. You mean Chinese government ceases to intervene the currency market and let Yuan appreciate? Therefore, the foreign reserve will suffer some losses? Again, let me remind you, that China is mainly a net producer of 'Intermediate good'. A higher yuan decrease the production cost, thus resulting cheaper Chinese exports and offsetting the currency affect. Actually I would like to see Chinese government forgo the managed float regime soon. I think they fail to see many great advantages it results. Will there be any political upheaval because of a higher yuan, and some losses in the foreign reserve account? No, I don't think so. Would you protest if the dollar rises in value? LOL.

 

The yuan has a "floating peg" relative to a basket of currencies, of which the dollar is one. As such, it is not pegged to the dollar in the traditional sense that the exchange rate doesn't change, but there is a narrow range within one can expect the exchange rate to be (and this range moves over time as the yuan slowly appreciates - this is a controlled appreciation, not floating).

 

I read some article suggesting that a basket of currency peg like Singapore's can help the Chinese to lower risk of bubble and at the same time keep the value fairly low. It does however require constant monitoring and extreme secrecy regarding the currency used in the pegged basket in order to avoid massive speculation.

Free-float on the other hand is risky, although it helps to cool down the heated property price and all. But the political risk is quiet high as Chinese goods become more expensive and the jobs will go away. This is something Beijing do not want to see. In addition, some economists even argue that it might even cause deflation. So free-float is just not going to happen.

 

The Chinese want to be a part of the free economic world too badly. The free float of the Yuan will happen eventually because it must. Otherwise the market will devise workarounds to that effect that will destabilize the Chinese government, and no one wants to see that happen - especially the Chinese government.

My recommendation - unless you're dealing with hundreds of thousands (in which case you're most likely not looking to me for advice), avoid the ETF's and buy the physical. Stick to the higher denomination bills, and avoid the pocket change as it gets difficult to exchange outside of China. If you don't have a big stack of Chinese Yuan sitting on a shelf somewhere in your home, you'd better get on it.

 

Find me a place that sells Yuan with tight spreads and I may consider it. But I would rather wait till the currency starts to float and buy it from day one with the use of leverage.

P.S. I went to China Town in London and the spreads there are something like 10 - 13 Yuan per GBP, when you could get dollars (and other currencies) on a lot tighter spreads at the same place 1.63 - 1.70. You are never going to make money this way.

 

Oh, and by the way the U.S. dollar is the one causing asset bubbles and not the Yuan, i.e. borrow dollars for free (thanks Ben), sell them short and earn 10 - 20% per year on the dollar's weakness (thanks Ben) and then buy up other assets any place around the world, such as China (because you know their currency can only go up) or other emerging markets with strengthening currencies and appreciating asset values. It's like earning triple returns on one investment.

One day (during the next stock market crash) this carry trade will unwind and the dollar will spike just like it did in 2008. That is when you want to get in long the USD on the FX market using lots of leverage. It may take a few years, but the longer it takes, the bigger the return you will get.

 

stk123, agree completely.

We are reflating what was an artificial financial bubble with more artificial finance instead of production. A lot of people are skimming the system again. The next crash could be worse than the last. I sure hope not, but it is clearly possible that a 40% down move in world equity markets from here is pretty likely in the next year or two. The dollar and Yuan will spike when that happens and people with both will buy a lot of things, for example oil to fill the SPR or food to feed a billion people.

Beav Real Wisconsin News
 

Good discussion, let me express my idea and please do give feedback on its plausibility and also marketability.

Would it be possible to create "floater" and "reverse floater" derivatives on the yuan, where the two floating derivatives would cancel each other out to equal the pegged yuan? I think this would be a novel idea to expose businesses to the equivalent of a free roaming yuan that would be based on the market consensus of how a floating yuan should be valued, or if the business prefers to have an inversely correlated exposure to the yuan then they could utilize the reverse floater as I have described it.

Many many businesses in the world have exposure to the yuan and probably would like to manage the risk inherent in their business; this novel idea may be a way to go.

What are your sentiments?

 

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