Chinese Yuan is Going For Gold… Literally!

Smart Money Europe's picture

The Chinese yuan, or the renminbi as some like to call the Chinese
currency, is going strong again, breaking the 6.5-dollar-level over
night!

The strong move follows on the dovish speech and Q&A session of Ben Bernanke last night, which delivered no radical change of Fed policies.

So there went the dollar, dropping against most commodities and currencies, especially the Chinese yuan.

Not only Bernanke seems to spur a stronger Chinese currency, also
officials from the World Bank gave some comments on a rising Chinese
yuan.

The Wall Street Journal reports:

“If you have inflationary pressures, appreciating the
exchange rate can help you with that,” Louis Kuijs, senior economist at
the World Bank office in Beijing, said at a press briefing. “The
theoretical case and empirical evidence of the role of the exchange
rate in these kinds of matters is so overwhelming that it shouldn’t
really be an issue of debate.”

“On the inflation issue, certainly the more quickly you do it the more impact you get,” he said.

 

Recent inflationary pressures are coming from food items such as
meat, largely due to rising global prices for imported soybeans and corn
which go into animal feed, he said.

 

“So if you were to appreciate today, you would get your soybeans 10%
or 5% cheaper, you would get your corn cheaper, you could have a very
quick impact on the cost structure of some of the sectors where
inflation is the highest.”

The comments from the World Bank followed shortly after they upped their GDP forecasts for China!

Via MarketWatch:

The World Bank raised its forecasts for China’s gross
domestic product growth to 9.3% this year from 8.7% previously, and 8.7%
next year from 8.4%. The upward revision is based on the country’s
stronger-than-expected performance in the fourth quarter of last year
and the first quarter of 2011, it said.

 

China’s GDP grew 9.7% from a year earlier in the first quarter.
According to official government estimates, GDP rose by 8.7% from the
previous quarter on an annualized, seasonally adjusted basis, but the
World Bank’s own estimates of on-quarter growth are slightly higher, it
said without elaborating.

 

The international lender now forecasts that China’s consumer price
index will rise by 5.0% this year and 3.4% next year, up from its
previous forecasts of a 3.3% rise in both years.

 

Food price increases, which have been a main driver of inflation in
China, will likely slow over the next 12 months, resulting in moderating
overall inflation, the World Bank said.

Slowly but surely, the Chinese yuan is catching up on the US Dollar.
At the current pace, it’ll only be a matter of months before the yuan
breaks into new record territory!

In the meantime, gold demand in China is surging!

China experienced a 21 percent year on year rise in gold
demand  to 571.5 metric tons in 2010, according to statistics released
by the China Gold Association. Demand for gold jewelry increased better
than 5 percent to 357.1 metric tons and demand for gold coins jumped 55 percent to 16.61 metric tons.

 

China’s demand for gold bars also experienced very strong growth, rising 94 percent year on year to 141.9 metric tons,
while gold consumption by the industrial sector increased 18 percent
to  47.4 metric tons, and gold consumed for other purposes grew 15
percent.

China is ramping up its gold demand as a way to fight
against inflation amid complicated global economic environment. The
World Gold Council expects that China’s annual gold consumption will have the potential to double in the next 10 years.

Not only the people of China are scrambling for gold, also the
authorities i.e. the People's Bank of China (PBOC) is talking gold
nowadays!

Per WSJ:

PBOC Gov. Zhou Xiaochuan said last week the government is
working to reduce the accumulation of foreign-exchange reserves, which
pump excess cash into the economy and “exceed our reasonable
requirements.”

 

“There is no comprehensive or systematic solution, but the PBOC has
to think of ways to stabilize the domestic money supply, otherwise it
will lead to asset bubbles. Such a fund would be an attempt at finding a
way,” Chen Xingdong, economist at BNP Paribas, said.

 

A forex stabilization fund is generally composed of gold, forex and domestic currency, the report said.

Do we hear a ‘yuan gold standard coming up?!

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