In Advance Of G-20 Meeting, China Announces Dollar Peg To End

Tyler Durden's picture

In a statement posted on the PBOC's website late last night, the Chinese central bank has announced it will seek a flexible yuan, ending a two-year peg to the dollar. The news comes a week before the G-20 meeting at which the CNY exchange rate was set to be a key issue of debate. On the other hand, as the PBoC noted, With the BOP account moving closer to equilibrium, the basis for
large-scale appreciation of the RMB exchange rate does not exist." As such, a large initial move is unlikely to occur, and the bulk of the volatility will likely strike at traded CNY forwards.

Full statement:

Further Reform the RMB Exchange Rate Regime and Enhance the RMB Exchange Rate Flexibility
In view of the recent economic situation and financial market developments at home and abroad, and the balance of payments (BOP) situation in China, the People´s Bank of China has decided to proceed further with reform of the RMB exchange rate regime and to enhance the RMB exchange rate flexibility.

Starting from July 21, 2005, China has moved into a managed floating exchange rate regime based on market supply and demand with reference to a basket of currencies. Since then, the reform of the RMB exchange rate regime has been making steady progress, producing the anticipated results and playing a positive role.

When the current round of international financial crisis was at its worst, the exchange rate of a number of sovereign currencies to the U.S. dollar depreciated by varying margins. The stability of the RMB exchange rate has played an important role in mitigating the crisis´ impact, contributing significantly to Asian and global recovery, and demonstrating China´s efforts in promoting global rebalancing.

The global economy is gradually recovering. The recovery and upturn of the Chinese economy has become more solid with the enhanced economic stability. It is desirable to proceed further with reform of the RMB exchange rate regime and increase the RMB exchange rate flexibility.

In further proceeding with reform of the RMB exchange rate regime, continued emphasis would be placed to reflecting market supply and demand with reference to a basket of currencies. The exchange rate floating bands will remain the same as previously announced in the inter-bank foreign exchange market.

Chinas external trade is steadily becoming more balanced. The ratio of current account surplus to GDP, after a notable reduction in 2009, has been declining since the beginning of 2010. With the BOP account moving closer to equilibrium, the basis for large-scale appreciation of the RMB exchange rate does not exist. The People´s Bank of China will further enable market to play a fundamental role in resource allocation, promote a more balanced BOP account, maintain the RMB exchange rate basically stable at an adaptive and equilibrium level, and achieve the macroeconomic and financial stability in China.
Submit Date:2010-6-19 19:00:00

Tim Geithner immediately responded to the development: “We welcome China’s decision to increase the flexibility
of its exchange rate. Vigorous implementation would make a positive contribution to strong and
balanced global growth. We look forward to continuing our work with
China in the G-20 and bilaterally to strengthen the recovery.”

The move will likely have substantial negative developments to various sectors of the Chinese economy:

Companies focused on the Chinese market, including Beijing- based computer maker Lenovo Group Ltd. and Shanghai-based China Eastern Airlines Corp., said in March that they would gain from lower import costs and stronger consumer-purchasing power should the yuan appreciate. Textiles makers would stand to lose the most and some would “face bankruptcy” as their profit margins are as low as 3 percent, Zhang Wei, vice chairman of the China Council for the Promotion of International Trade, said in March.

Of course, in a recreation of the aftermath of the US credit bubble, the biggest losers will be private lenders, straddled with trillions in ever more worthless real estate loans, which will suddenly now become an even greater drag, due to a stronger currency. What this means, is that the rolling wave of QE will soon hit China next, after the US and Europe. Which makes sense: China's central bank is not saddled with the same gargantuan amounts of bad debts as the Fed, and soon, the ECB, which makes it a convenient last receptacle of toxic waste in exchange for one last attempt at a global liquidity pump. This will likely buy Keynesianism a little more time. In the meantime, we once again highlight the relationship between the CNY and the Chinese 30 Day Repo Rate. With this number having hit near record highs, courtesy of a recent move lower in the CNY, it only seemed inevitable that China would be forced to unlock its own interbank lending market in whatever way it could.

The question now becomes what will the aftermath of this announcement be? As the FT points out, investors are likely to read into it a little more than prudent:

“The danger is that on Monday morning everyone gets very excited and then end up being disappointed with what happens. There is very little appetite for appreciation, so in the short-term the central bank is likely to be very conservative,” said Stephen Green, an economist at Standard Chartered. “As a result, the US-China relationship could still be very tricky.”

Lastly, with less dollar purchasing by the PBoC, and also courtesy of recent foreign trade deficits, should the bank be serious in its intentions, this simply means that increasingly fewer dollars will be held in the Chinese FX reserves, which in turn will mean increasingly lower Indirect bidder (and/or Direct assuming this particular category is merely China acting covertly out of London, instead of just the Fed monetizing surreptitiously) interest will drop to the point where Primary Dealers (and UK) will be the only end purchasers of US bonds.

Either way, this is sure to play major havoc with already extremely volatile EUR, CHF, GBP and JPY pairs.

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ghostfaceinvestah's picture

All talk to take the heat off before the G20, then they will just go back to the merchantilist ways.

This story belongs in the file with the $1T of supposed minerals in Afghanistan - pure bullshit.

thesapein's picture

It was just a matter of time. The peg could only protect the dollar for so long.

taraxias's picture

Spot on.

Read the press release, nothing more than a "non-committal committal" just before the G20 meeting.

chinaguy's picture

Agreed  GFI...They will let it float a small bit to knock back inflation a tad (inflation is BAD in China now) & get the US off it's back and then it's back to business as usual.

doublethink's picture


History Rymes


(Reuters) - The U.S. Treasury market may be vulnerable to a sell-off on Monday on fear that China's move to allow more flexibility for its currency means the world's largest holder of U.S. sovereign debt will cut future purchases.


dnarby's picture


Everyone is expecting the Yuan to rise.  This will theoretically help US exports.  Time to gun stocks!

...Except that when the Yuan is floated, it will likely sink instead.

In the process, the Chinese continue to trade their Yuan for gold ahead of the "Great Reset".

thesapein's picture

Well, if the yuan sinks, then the value of our debt to China skyrockets! That is the worst case scenario according to Ben and Tim, no?

dnarby's picture

Yes.  Race to the bottom ^10^10

thesapein's picture

The whole killing our dollar and destroying our purchasing power in order to theoretically help exports never made much sense to me. It's like, let's be so poor that others can buy more from us. Why are we so excited about taking our turn as a poor nation?

dnarby's picture

Because in order too keep the global fiat "growth" machine running, a 'hard' currency nation had to debase it's currency.  That was the US.  That run is over.

Now they're going to try some other scheme.  Problem is, they don't have the guns to bully the rest of the world to go with it.  The majority of nations will agree on a new reserve currency to measure all others against (and the ones that don't will be forced to follow), it's just that it won't be used directly to settle payments for goods and services.

I am intentionally being vague so to get people to think "Hmm...  What could that currency possibly be?"

thesapein's picture

Well, one thing never changes; Gold has pretty much always been the one world currency. So, even as people try to prop up any new ones, gold will most likely be the one always left standing. Does that about answer your question?

nuinut's picture

Hmmm..... well it would need to be a currency that was free to float, for a start.

dnarby's picture

I find it fascinating how the Gulf sea floor is mimicking the world monetary systems.

Apostate's picture

The unconscious is the most powerful force in the human mind. The consonance of the gusher in the Gulf has great resonance. 

Oh regional Indian's picture

Very resonant comment Apostate-ji.

Like a Hummmmmmmmmmmmm....

And now that they are saying it is radioactive AND full of Methane, I think we are in runaway reaction mode.

All things will go belly up, which is where we started anyways, so, all good, eh?


fearsomepirate's picture

It's based on sort of a clumsy theory of "exports = good" and "imports = bad."  Thus exports are a positive term in the GDP equation, and imports are a negative term.  So increasing exports = increasing GDP = good.  But what is going on substantially (cutting out the Keynesian aggregation bullcrap) is simply that increased exports mean real wealth is leaving the country; in short, we're paying for decades of importing, not getting richer.  Inflation also disguises losses as profits, since businesses don't account for currency depreciation in their book-keeping.  Say I make a widget for $100 at the beginning of the year and sell it for $110.  I record a $10 profit.  But if the currency depreciated by 15% in that time, that $110 is $93.70 in last year's money.  I *really* lost $7.50.  But my books don't tell me that, so I keep plowing on ahead, losing more and more wealth until all my capital is gone and I go bankrupt.

tmosley's picture

Think about what you are saying, and HOW the Chinese maintain their dollar peg.

Their government buys ALL the dollars that come in, and prints yuan according to their peg and hands them back those same Yuan. How exactly is a cessation of money printing going to cause their currency to lose value?

Further, how is their government going to keep getting dollars to US treasuries?

fearsomepirate's picture

The most important question is, "And who is going to buy US Treasuries?"


Bueller?  Bueller?

Trimmed Hedge's picture

I just came back from China.

They are kicking our asses over there!

MsCreant's picture

What? Making bad loans? Building buildings no one needs? Blowing a real estate bubble? Appointing short little trolls to their treasury/fed? Striking?

Be specific regarding how they are kicking our asses.

Popo's picture

Well, see ...they can get their peasants to do a full day's work for nothing but a bowl of rice.

That kicks ass!

thesapein's picture

They just don't looks so bad because we are so much worse.

TBT or not TBT's picture

Your forgot to add:  growing old fast?  murdering female infants?  Being a murderous dictactorship?

Bear's picture

They are so smart that they even own 1 trillion of our treasuries.

fearsomepirate's picture

When your starting point is Maoism, switching to a backward, fascist, mixed economy is an infinity percent improvement.

thesapein's picture

I'm not impressed. Beating up a dying man who is already choking on his own vomit, doesn't make you superman. China just looks so great compared to us.

dnarby's picture

More like beating up on a brilliant and powerful person who is hobbled by a bad drinking problem...  But who is about to sober up.

The Chinese can't come up with an original idea to save their hive-mind souls.  Must be mercantilism is genetic.

thesapein's picture

Keep telling yourself that.

Right, lol, Americans are so original. We don't look like a hive from the inside.

doggings's picture

The Chinese can't come up with an original idea to save their hive-mind souls.

honestly, how ignorant.  it actually reminds me of:

"what have the Romans ever done for us eh?"

er, the compass..  paper-making, paper, printing, fireworks, tea, kites,the fire lance, land mine, naval mine, hand cannon, exploding cannonballs, multistage rocket, and rocket bombs with aerodynamic wings and explosive payloads, coffins, bells, fermented beverages.

..oh, and paper money.

5000 years of history as opposed to what will be remembered as America's 15 minutes of fame ;)



dnarby's picture

Sorry, I forgot that the Chinese invented the printing press, calculus, the assembly line, radio wave communications, the telephone, the internal combustion engine, alternating current, electric motors, nuclear power, the transistor, integrated circuits, robotics, chaos theory, particle accelerators, communication & GPS satellites, space travel and teh Internets.

Seriously, can you name anything they have invented in the last 100 years?



thesapein's picture

Name one thing you've invented in your entire life.

doggings's picture

haha spoken like a true "patriot"

well they also wrote the definitive book on war

seven thousand years before you sons of potato pickers even got to the Red Indian's land a mere blink-of-an-eye ago in what will become the annals of history

So I dont really think your bunch of cowboy muppets have much hope in the long run, economically, politically or military, they're out-strategising you daily. ;)

doggings's picture

haha spoken like a true "patriot"

well they also wrote the definitive book on war

edit 2 1/2 (doh) thousand years before your lot even got to the Red Indian's land a mere blink-of-an-eye ago in what will become the annals of history

So I dont really think your bunch of cowboy muppets have much hope in the long run, economically, politically or military, they're out-strategising you daily. ;)

Gold...Bitches's picture

Kites and Coffins? Kites and Coffins? Yes, its time to be afraid of the juggernaut that is China...

thesapein's picture

Actually, if you look at their newest art of war, which makes most of our navy obsolete, there is much to fear. An enemy that can take out your satellites (blind you) and sink your navy without even calling any soldiers to arms is maybe someone to fear.

anony's picture

I don't believe there is a government statement made for public consumption anywhere in this galaxy that has one scintilla of credibility.

The governments of the world are infested with humanoids missing a truthiness gene, and as a result are congenital liars, gypsies, tramps, and thieves.

In another universe they would all inhabit the ninth ring of hell.

dabug's picture

Nothing wrong with Tramps or Gypsies, what are you a bigot? name calling is fun huh?

Bam_Man's picture

gypsies, tramps, and thieves

Thanks a lot.

Now I have to listen to Cher sing that inside my head for the rest of the day.

LoneStarHog's picture

I see the Chinese masters are playing with their Little Tiny Tim speaking doll (Made in China).  They just love pulling the string that is stragetically placed up his ass to hear him say, "We welcome China’s decision to increase the flexibility of its exchange rate."

Makes America proud to have Little Tiny Tim as Secretary of the Treasury.

Atomizer's picture


Avinash Persaud discusses the debate on financial regulation, the role and mandate of the Financial Stability Board ( FSB) and its relationship with the G20 at CIGI's Issues for 2010 Summits conference (May 2010). Avinash Persaud is the Chairman of Intelligence Capital Limited, which he established in 2005.

Implementing the Europe 2020 Strategy: Key Next Steps

Wake up peasants. Don't cry a river of tears once these changes are implemented.

dnarby's picture

I'm not sure what you took away, but it looks to me like Freegold is coming.


breezer1's picture

can't be stopped. will be a big jump also in silver.

AnAnonymous's picture

China is taking risks there. As the peg might not deliver the expected result, they put themselves a target in their back.

Because what is it going to be next time? The US since the beginning has always blamed others. In the end, the US will tell that the problem is China.

TBT or not TBT's picture

In the end, China will not just know it has huge impending problems, it will be a miserable mess of unprecedented scale, and scale is about all that will differentiate it from previous historical collapses seen elsewhere in history.

AnAnonymous's picture

The biggest problem for China at present times is the US. Today, China complies. And tomorrow, the US might come as well that due to their strengthened currency, China is consuming too much.


Looks like China is going to take the blame for the disastrous consequences of the US policy.

Kali's picture

China's powerhouse was its cheap labor, now threatened.  It seems the workers are not willing to carry that load anymore.  One of the most interesting items I find is what is stated in the Guardian article, the workers are organizing on their own, outside of the Unions and the Party.

China powerbrokers fear the masses as much as the powerbrokers do here in the US or Europe.

I cannot find the link for my next statement, it was from a couple years ago (?).  It was an interesting tidbit, that the Chinese bought a 15 or 20% interest in the Rothschild Bank.  I thought that was amazing, that China was allowed to come in the fold and that China would want to.

So, what my question is, what makes you think the powers that be in China are not part of the global elite plan?  They have followed the same track as the Europeans and the US, albeit, in a much more closed society.  As MsCreant stated above, how are they different?  All part of the same game, with the same people.


Trimmed Hedge's picture

"China powerbrokers fear the masses as much as the powerbrokers do here in the US or Europe."


Nobody fears the masses, son.

The lower classes of the entire world have been pussified.

bank guy in Brussels's picture

Not really true in Continental Europe, where people have not been repressed and beaten down over years by the insidious Anglo-American type legal systems which function as extortion rackets against the people.

You saw the reality in Greece. We still have the heritage of the French revolution here, and people are intrinsically ready to spontaneously assemble into a huge mob, demonstrate, riot, and somewhat burn the place down if they feel they are pushed hard enough.

That is part of why it is much nicer to live here, governments on the Continent still fear the governed.