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Will China's Currency Peg Be The Next To Fall?

Tyler Durden's picture




 

Submitted by Charles Hugh-Smith of OfTwoMinds blog,

I suspect China's leadership is wary of unpegging the RMB for one reason: the FX market is too large to manipulate for long.

What is China's currency the renminbi (RMB, a.k.a. yuan) really worth? Nobody knows, because price discovery has been thwarted by the RMB's peg to the U.S. dollar. This peg has shifted over time, from 8-to-1 some years ago to the current peg of 6.24-to-1.
 
What does the peg mean for China's currency and economy? Gordon T. Long and I discuss the many issues in our latest video program.
 
 
A pegged currency rises and falls against other currencies along with the underlying currency. As the dollar weakened from 2010 to mid-2014, China's RMB weakened along with it. This allowed Chinese authorities to lower the peg without affecting the competitive value of the RMB.
 
Now that the USD has gained 16% in less than a year, that rise is dragging the RMB higher with it, making China's goods less competitive in markets outside the U.S. (and countries which use the USD as their currency).
 
This major move has prompted Chinese authorities to widen the peg's range to allow the RMB to weaken slightly against the dollar. Japan's stunning devaluation of the yen has prompted much speculation that China will be forced to either end the peg to the USD or loosen the peg to match the depreciation of the yen.
 
What will happen should China end the peg and allow the RMB to float freely on global foreign exchange markets? Nobody knows, and that uncertainty is likely one reason why Chinese leaders are maintaining the peg. Uncertainty is disruptive, especially when it affects the value of currencies, which then affect the relative competitiveness of China's all-important export sector.
 
When China does end the peg, many factors will go into pricing the RMB on the global market. Currencies generally act like other commodities: their value is set by supply and demand. If there is strong demand for RMB and limited supply on the FX market, the value will rise.
 
If there is low demand and abundant supply, the value will decline against other currencies.
 
I suspect China's leadership is wary of unpegging the RMB for one reason: the FX market is too large to manipulate for long. China's leadership is accustomed to controlling key elements of the Chinese economy, and the idea that the global market would determine the critical value of the RMB rather than the Chinese leadership must be sobering.
 
Though much is made of China's huge stash of foreign-currency reserves (almost $4 trillion), FX markets trade more than this sum every day. China could clearly defend its currency for quite some time, but even $4 trillion isn't enough to defend a valuation that is wildly out of touch with the market.
 
A currency reflects much more than the interest paid on the issuing nation's bonds and its foreign reserves: fiscal and trade deficits/surpluses, the vibrancy and resilience of the economy, the ability of the central state to manage the economy, private bank credit, transparency, costs of corruption, ease of doing business, how foreign investment capital is treated, the skill levels of its workforce and so on.
 
One cost few seem to factor in is China's enormous unfunded liabilities--not just pensions and healthcare, but the staggering costs of remediating its horrific environmental damage.
 
 
These costs will be a drag on China's economy for decades to come, and the treasure needed to repair the damage will come out of private profits, wages and government revenues.
 
If nothing is done to truly remediate China's immense environmental damage, the cost will be borne by its residents in poor health and productive lives cut short. That's not something that can be pegged to another nation's currency.

 

 

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Sat, 02/14/2015 - 15:32 | 5784715 Headbanger
Headbanger's picture

Yes

Next question

Sat, 02/14/2015 - 16:02 | 5784806 realmoney2015
realmoney2015's picture

“What is China's currency the renminbi (RMB, a.k.a. yuan) really worth?”

It’s worth whatever it is printed on. I assume it’s like the dollar and is printed on a mix of cotton and paper fibers. So basically it’s worth zero, just like all the fiat currencies in the history of the world.

These currencies will reach their true value, probably sooner rather than later. Please, Please, Please protect your wealth and buy silver while your dollars are still accepted. Try to get your neighbors, friends and coworkers to get started with silver as well. I gave some of these candles with silver coins (https://www.etsy.com/shop/ScentSavers?ref=hdr_shop_menu) to my friends. Several are no going to their local coin store regularly to exchange their funny money in for real money!

Sat, 02/14/2015 - 16:35 | 5784860 kaiserhoff
kaiserhoff's picture

In two different posts, a couple of weeks ago, ZH reported that the Communist regime had arbitrarily raised the wages of government employees (good party members all) by 60%.  I have seen no follow up reporting in any media.

If true, the citizens must be pissed, but of course they dare not say much.  Anyone have additional info on this? Seems like a potential powder keg.

Sat, 02/14/2015 - 22:47 | 5785844 pachanguero
pachanguero's picture

I live in Pattaya Thailand.  This country is in the middle of a world class bubble that is bursting now.  Decades of fast money have led to a property bubble like the world has never seen.  I was in China three months ago.  Same thing.

This is real.  I see it everyday. I'm 58 years old, Econ-grad, Vet and Speak three languages.

Scares the living shit out of me............

 

 

Sat, 02/14/2015 - 22:48 | 5785891 pachanguero
pachanguero's picture

Down vote me if you want but the view from your apartment window is not going to change.....

 

Sun, 02/15/2015 - 05:23 | 5786366 supercelld
supercelld's picture

I'm making over $7k a month working part time. I kept hearing other people tell me how much money they can make online so I decided to look into it. Well, it was all true and has totally changed my life. This is what I do... www.globe-report.com

Sat, 02/14/2015 - 15:33 | 5784718 Payne
Payne's picture

china will not depeg as long as they can buy Gold at these prices !

Sat, 02/14/2015 - 15:57 | 5784797 sampo
sampo's picture

Rather sooner than  later they WILL depeg and that WILL lead to Gold and Silver remonetization rather sooner than later.

Sat, 02/14/2015 - 17:00 | 5784938 SWRichmond
SWRichmond's picture

I cant say about sooner or later, but we have definitely started the overt stage of currency wars.

Sat, 02/14/2015 - 15:40 | 5784731 dimwitted economist
dimwitted economist's picture

i hear China Ain't doing so well.. (much like the rest of the world) but.. it's most likely just a conspiracy thingy.. LOL!

Sat, 02/14/2015 - 15:48 | 5784749 pashley1411
pashley1411's picture

China's peg works in favor of those who run China (duh), the commie-oligarchs.    So the peg tells you that the oligarchs are exporters; they make money by underpricing China's resources and labor, maximizing exports.

Similarly, the US runs the dollar in favor of the oligarchs here.  The oligarchs make money as importers (and as part of governments, who are also consumers); and so the US oligarchs have overvalued the dollar to maximize imports, American exporters and employees be damned.   The overvalued dollar also allows American investors to buy foreign asses on the cheap.

China reorientates when the money pours into stupid investments and, for production purposes, evaporates.

The US reorientates when the producing parts of the economy have gone away; over-seas, production changes to minmal labor and resource inputs,

Sat, 02/14/2015 - 16:05 | 5784812 Kayman
Kayman's picture

"The US reorientates when the producing parts of the economy have gone away" ???

  Remove "Government, Finance, Insurance, Real Estate, and Services" from GDP and remind me again what we actually "produce"?

  The reorientation has been going on for as long as Clinton lobbied to get China into the WTO. Of course, Clinton being in the pocket of a certain Akransas-based minimum wage, welfare-dependent Retailer had nothing to do with it.

  Of all the stupid political blunders- along with "let's git Saddam and his WMD", and "let's see if poking the Russian bear with a Ukrainian stick will get the bear's attention"- one of the greatest blunders in American history will be supporting and financing the Chinese Communist Party out of the corner they had painted themselves into.



Sat, 02/14/2015 - 17:00 | 5784937 disabledvet
disabledvet's picture

Two excellent comments and one answer as to what the USA produces is an enormous amount of energy.

The problem as anyone from North Dakota will tell you is building out the infrastructure such that the market of of their oil and distillates can in fact be realized.

 

This requires enormous amounts of capital with very low probability of success.

 

Wall Street would rather you buy a trillion in CMBS for example.

 

Having said that the build out of the Houston ship channel and widening of the Panama Canal should tell folks something.

 

There is an expectation of a return on the capital...eventually.

 

Mostly what the USA has produced...I agree...is housing with some electric cars thrown in.

 

That's about it.

 

Well, apparently "space launch systems" too.

Gotta watch out for that.  The Dutch Gilder was a global reserve currency for over a century.  The economics of outer space...in theory...is a big time game changer.

The collapse of the ruble has mad a lot of "space stuff"...again, in theory...suddenly "economic."

 

In other words forget the Government...you yourself or your "enterprise" might now determine "now is the time to go for zee gold" so to speak.

Sat, 02/14/2015 - 19:38 | 5785394 BrosephStiglitz
BrosephStiglitz's picture

All eyes are on Europe right now, and it is understandable as to why, but I still maintain that the black swan would be coming out of Asia. Japan and China are not exactly looking awesome. 

Sat, 02/14/2015 - 16:07 | 5784816 Harbanger
Harbanger's picture

I Agree with your post. 

Was this a typo?

"The overvalued dollar also allows American investors to buy foreign asses on the cheap."

Sat, 02/14/2015 - 16:16 | 5784833 new game
new game's picture

one of them bought my 'ass'et for 720k, 1/08. best fucking day of my life...moved in a icestorm though.

Sat, 02/14/2015 - 15:46 | 5784750 pashley1411
pashley1411's picture

dup

Sat, 02/14/2015 - 15:49 | 5784768 Soul Glow
Soul Glow's picture

<--- They depeg and the value of the yuan goes up

<--- They depeg and the value of the yuan goes down

Sat, 02/14/2015 - 16:08 | 5784819 Kayman
Kayman's picture

Soul Glow:

You left out the option of the yuan goes up and down.

Sat, 02/14/2015 - 15:50 | 5784773 stant
stant's picture

When they unpeg they will be ruthless like the Swiss were. Picking the veary most painfull moment, and causing the most losses

Sat, 02/14/2015 - 15:52 | 5784781 Max Steel
Max Steel's picture

Chinese have already acheived their peak growth . 

Sat, 02/14/2015 - 17:06 | 5784949 goldhedge
goldhedge's picture

Peak growth will come after ww3

Sat, 02/14/2015 - 17:06 | 5784950 disabledvet
disabledvet's picture

Appears the battle shaping up is yen/yuan but I am no expert in these things.

 

Gold mining stocks have taken off like a rocket this year...including the Juniors which are in debt up to their eyeballs.  That should be very bullish for gold but we'll see.

Sat, 02/14/2015 - 16:09 | 5784815 new game
new game's picture

as the world situation spins downward the dollar strengthens. the chinese are fucked, to keep it simple.

no diplomacy needed. i am already lol'g cause you can imagine how i feel bout chiman...

qe 4 and back to "normal". ha...

Sat, 02/14/2015 - 16:15 | 5784832 Yen Cross
Yen Cross's picture

  Not in the near future. The PBoC has allowed to band to be breached a few times over the last couple of months for brief periods of time.

The PBoC would like to have the Yuan strengthen, as it's a positive for internal consumption. The PBoC knows that it's massive GDP growth through exports is over, so the weaker currency doesn't make as much sense.

 The biggest problem the PBoC has is the short Yuan speculative carry trade. There's already a net investment outflow from China, so the PBoC is is playing "rock*paper* scissors*" with the yuan. I don't see the trading band widening as the $usd continues to soften into March.

Sat, 02/14/2015 - 16:20 | 5784841 bankonzhongguo
bankonzhongguo's picture

The peg will only lower or be eliminated when enough of the China, Inc insiders are getting enough kickbacks from GS and JPM.

I don't see that happening any time soon.

China operates on a much slower timeline than the rest of the world.  How could any China hand look at the post Mao modernization, re-industrialization and pronounced relativization of the US and the dollar in less than 30 years as unsuccessful?

The hilarious thing still is that while the US had to invest post WW2 mechanisms like the IMF, WB and Marshal Plan to export finished products to the developing world - that model worked from 1950 to 2010. China need only invest its own energies into its own interior to have 10x the same impact, never mind Africa, etc.

China is famous for disorganized feudal practices so they can certainly screw the pooch, but now that the world has outsourced so much industry to them I can't see China letting anything go while they watch the US Fed monetize ALL the US debt.  All China wants to see are those US carriers strike groups tied up in base.

China should simply start air-dropping pallets of 20 and 100 yuan notes a la helicopter Ben across the American Midwest and Africa in order to make dollar perception waiver even farther.  Pretty funny to have 100 billion in yuan notes literally flying across the skies and gathered up by hungry teenagers and the American poor to redeem for their Dollar Menus.

One of the these days, when interest rates reconnect with market forces, China will compel Wal-mart to settle all trade in yuan or gold.

It will be interesting to see China's participation with the TPP and the TTIP over the next 10 years.

 

 

 

Sat, 02/14/2015 - 17:55 | 5785064 ghostzapper
ghostzapper's picture

A few days ago I posted this:

HK
China
Iraq

Some geniuses down voted me.

The reset is already underway fellas.

Sat, 02/14/2015 - 18:35 | 5785183 SofaPapa
SofaPapa's picture

As to remediating the environmental damage, the Chinese seem quite willing to completely ignore it.  Tragic for humanity, and potentially a contributing factor to the extinction of homo sapiens over time.  It's a bigger story than the play it gets.

Sat, 02/14/2015 - 18:43 | 5785206 bid the soldier...
bid the soldiers shoot's picture

It's too bad you didn't see the whole picture that illustrates "the USD has gained 16% in less than a year."  

And work into your article the fact that the rise of the USD began with the Ukrainian Nazi coup in Kiev in February 2014.

Nor do you mention that the rise of the USD went hand in hand with the fall of the RUB.  As if the Fed and all the allied Central Banks began to sell the ruble and buy the dollar according to the Grand Rabbi of Gelt Aviv, Stanley Fischer's Master Plan and Final Solution of the Intolerable CHUTZPAH of the Russians to think they had anything worth saying to the West.


The only thing we know for certain about the incredible rise of the USD, is that Washington's sneak attack on the middle class now has opened a second front on American exporters and their businesses.

IN PREPARATION FOR THE END OF LAISSEZ-FAIRE CAPITALISM AND THE ONSET OF NEO-FEUDALISM.

  

"Now that the USD has gained 16% in less than a year... " 

"Though much is made of China's huge stash of foreign-currency reserves (almost $4 trillion)"

 

So, dude, China has foreign currency reserves of almost $4 trillion and it is worth 16% more than it was less than a year ago.

I'm not sure Xi Jinping knows who Liberace was, but I'm pretty sure Xi is laughing all the way to the bank too.

Sat, 02/14/2015 - 19:31 | 5785358 Goldilocks
Goldilocks's picture

The Price is Right, Extended Theme
http://www.youtube.com/watch?v=G8iOmVd1W_g (2:39)

Sat, 02/14/2015 - 20:06 | 5785484 NoTTD
NoTTD's picture

HKD first.

Sat, 02/14/2015 - 21:06 | 5785674 petkovplamen
petkovplamen's picture

funny how the Western media is obsesed with China and how much Chian's currency is worth. The better question for the American sheeple is how much is the dollar REALLY worth. Let's make an article about that instead, after all most reader of ZH ARE Americans.

Sun, 02/15/2015 - 06:23 | 5786401 vyeung
vyeung's picture

You are missing a key aspect in the discussion and that is a FX market reset from the current fiat regime. You are assuming that the current regime can be maintain and be stable for future economic development. I'm afraid you have missed a huge chunk in your discussion. You are but discussing the current transitionary period where it will effect the economic activity based on the current FX regime constraints. Tells us nothing about the future moving forward except they have this huge pressure to devalue for export purposes. ITS OLD NEWS, TELLS US VERY LITTLE!

Sun, 02/15/2015 - 10:25 | 5786592 Tirion
Tirion's picture

Am I living in some kind of parallel universe? For years, the Chinese have been pushing for global monetary reform based on replacing the unipolar petrodollar system and replacing it with a multi-lateral system using the SDR as the global reserve currency and unit of account. They have the active support of the G-20, the UN, the IMF and the Obama administration (but not Congress). A key objective of the Chinese is to have the RMB added to the SDR basket, and the IMF Review of the SDR will begin in May. If the Chinese are serious about this, they will have to abandon the peg before May. The idea of one reserve currency being pegged to another is a non-starter. So my money is on the peg being broken before the end of May.

Another part of this process will probably be an official announcement before May of the increased size of China's central bank gold holdings.

Chinese officials are also on record going back several years saying that 2015 is their target date for full RMB convertibility. It would certainly help their case vis-a-vis joining the pantheon of reserve currencies in the SDR.

On the other hand, perhaps the US will (as usual) launch the mother-of-all false flag operations to provoke a major war, in which case of course all bets would be off.

Also please remember that it is another key objective of Chinese policy to re-balance its economy away from exports towards consumption. In the new SDR era, prosperous Chinese consumers will be importing cheap consumer good made in the USA. Currency reform is another key part of this objective. There are no free markets any more and the exchange rate will do what the BIS want it to do. In fact, it is thought that, as part of the IMF/SDR reforms, FX rates may no longer float and we will go back to a Bretton-Woods-type system in which rates will all be pegged to the SDR, partly to enforce the much-needed re-balancing of the global economy.

Sun, 02/15/2015 - 11:11 | 5786696 MEFOBILLS
MEFOBILLS's picture

The Chinese often quote "Triffins Dillema" as reasoning for SDR reform.  Triffins dillema is playiing out to disadvantage of U.S. mainstreet producers.   SDR's and dollars both serve as defacto reserves.  In new SDR era with RMB in basket, China's own private banks will have thier Sovereign unit rather than a foreign unit as basis for international credit. In other words, the International private money power won't be riding the U.S. to the same extent.  China's state banks will gain more control.

The better solution is Keyne's bancor system, where the Bancor marks goods movement.  A good goes one way, and a bancor goes in the opposite direction.  If a country becomes mercantile, then their extra bancors are taken from them and put into a general fund for redistribution.  Under this type of system, China would never have rigged its Yuan/Dollar exchange rate in order to be a mercantilist exporter.  All countries would benefit as all countries can export goods and keep their sovereign unit marked against the bancor.  Said bancor in turn would be denominated in a basket of commodities that don't change readily. To repeat, bancor is marked against goods movement, and can easily be related to commodities.  This is much more advanced concept than SDR's.  

Note that even with a reformed SDR unit, it is still a basket of currencies, and it still allows money to be traded for money.  This is an abstraction traded with an abstraction.  We've had many post bretton years to show theat FX trading causes manipulated imbalances.  Prior to that we had centuries of mercantilism in order to grab gold.

 

Sun, 02/15/2015 - 11:30 | 5786733 Tirion
Tirion's picture

That may all be true, MEFOBILLS; but the IMF, UN, G-20 and the US administration are not pushing to introduce a new global monetary system based on the bancor. They decided at the end of 2010 that the SDR was the way to go. Go to the IMF website. It's all there for everyone to see. The MSM are not reporting it, but that's another story.

I agree that replacing one fiat-based system with another may not be a lasting solution; but there are those who believe that, in addition to the RMB (and perhaps other currencies), gold (and perhaps some commodities) will also be added to the SDR this summer to give at least a semblance of being backed by something. That would probably be a good idea!

Sun, 02/15/2015 - 12:29 | 5786883 MEFOBILLS
MEFOBILLS's picture

I agree Tirion.  It's better than what we have.  But, humanity seems to be retarded when it comes to monetary science.  We don't learn well from monetary history.  The new SDR system will be more balanced, but it will primarily advantage those countries in reserve basket.

All money is law.  Therefore, having your money extend past your borders is a no no.  Worse, having your sovereign debt instruments being held by foreigners is another no no.   Allowing those sovereign debt instruments grow with usury, to then cause exchange rate collapses is not good science, and is the root of FX trading machinations.

There needs to be a third international unit, that cannot be manipulated, and which has proper feedback to prevent abuse.  The new SDR's will move in that direction, especiailly as they will have a rate window, but it is non ideal.   

 

Sun, 02/15/2015 - 19:20 | 5788203 Tirion
Tirion's picture

I agree that it's not ideal, MEFOBILLS, and I'm not advocating it. I'm just saying what has been agreed is going to happen. Indeed, the transition is already well underway. I guess we'll have to see how many currencies and commodities make it into the basket in the May review. With a system of global money, SDR bonds, global tax and global law for the twenty-first century almost upon us, I'm not sure that the concepts of sovereignty, borders, foreign exchange markets/trading and foreigners as we have understood them will have much relevance. The new system will break down, too, eventually; but it might see our succesors through much of the century.

Sun, 02/15/2015 - 15:43 | 5787559 theyjustcantstop
theyjustcantstop's picture

why wouldn't the brics peg their currency to an average of the combined value of the fed., boe., boj, and ecb, that's where all the large divergence happens, purposely, buying, and selling each others bonds, and equities?

that would get you out of being whip-sawed by the BIS, and would dilute the dollar somewhat.

 

Sun, 02/15/2015 - 19:28 | 5788227 Tirion
Tirion's picture

theyjustcantstop, that is kinda what they are planning to do. Have a look at this:

http://www.imf.org/external/np/pp/eng/2011/010711.pdf

 

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