Published On: Sun, May 4th, 2014

Yuan Seen Nuthin’

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Pinchas-Landau

Do you know what the exchange rate of the Chinese yuan is against the US dollar? Approximately? If you do, good for you. In the much more likely case that you don’t, you are in good company. Even most financial professionals don’t follow the Chinese currency closely. In the best case, they are vaguely aware that the value of the yuan has gone down recently.

On the other hand, anyone who pretends to have any interest in the financial markets knows what the dollar/euro rate is, and probably dollar/ yen too, in many cases, dollar/ sterling, dollar /swissie and others. But dollar/ yuan is not on most professionals screens — in the most literal sense. Most summary pages of foreign currency rates on Reuters, Bloomberg, etc., simply don’t include the Chinese yuan.

OK, so what? That’s the real question. Why is it important to know what’s going on with the yuan? After all, and with all due respect to China, the yuan is not freely convertible, its rate is carefully managed by the Chinese authorities and that not only explains, it seemingly justifies the doesn’t-matter attitude towards it. If you can’t trade it freely, then what is the point of quoting the rate?

That is how traders would see it, in a typically narrow, near-term, ‘bottom-line oriented’ approach. The simple response to this thinking is that since China is the second-biggest economy in the world, and the discussion centers on when it will overtake the US to become the biggest, it is probably sensible to follow the most accessible ‘representative’ of the Chinese economy.

To make this point in a more sophisticated manner, one would point to the declared policy of the Chinese government to move the yuan gradually toward convertibility, to the increasing number of countries that allow, or even encourage, bilateral trade between themselves and China to be conducted in yuan and, most dramatically, to the widespread belief that, one day, the yuan — as the currency of the world’s biggest economy — will be the world’s reserve currency.

Valid though these arguments are, they are all long-term considerations and hence not convincing reasons to be ‘plugged-in’ to the yuan/ dollar rate today, yesterday and tomorrow. The true reason why this is necessary, indeed critical, is because the yuan has recently been falling again the dollar (and all other major currencies).

Once again — so what? Don’t currencies rise and fall in value against each other all the time? Furthermore, given that the fall in the yuan is in the order of 3-4% over several months, what is there to make a fuss about? Oftentimes, major currencies make moves of that size in a week — and that represents an ‘event’. Surely this is just a minor blip?
These expostulations, however are wide of the mark. The big news is not how much the yuan has fallen in value, but rather the very fact that it has gone down. For the last five years or more, the official policy of the Chinese government was to slowly push the value of the yuan UP — the reasons why don’t concern us here. As a result, the yuan’s value rose from 7.18 to the dollar to 6.8, where it was held for some time, and then moved fairly steadily upward, eventually nearing 6 to the dollar late last year. The all-time high was actually 6.04, reached on January 14, 2014.

Because of this policy and its consistent implementation, every speculator in the world came to regard the yuan as a one-way bet. It could only go up, because the rulers of China — regarded as superior beings by many in the West — had decreed that it should. However, as discussed here last week, in the last 2-3 years some fundamental changes have occurred in China’s economy, which boil down to this: China is no longer getting stronger and stronger, it is showing increases signs of strain and weakness.

Furthermore, from late 2012 the Japanese currency (the yen — don’t confuse the two) stopped rising and rapidly weakened — as the result of a deliberate policy to create inflation. For the yuan to keep rising, in a world where China’s main rivals — the US, Japan and the EU — were all deliberately eroding their currencies’ value, and in a (novel) situation in which the Chinese economic miracle was running out of steam, was economic suicide.

However, as noted, in China it is the government and not the markets that determine the yuan’s rate and direction. Thus only after the decennial change of leadership in Beijing could the policy decisions be made — so that only in January did the yuan change direction and, for the first time in 20 years, begin to lose value.

At first people assumed it was just a minor blip, then they told themselves that the yuan would only fall by a percent or two, as the Chinese government made its point. When the yuan passed 6.20, they began to get worried. This week, 6.25 became history and the currency has already traded at 6.28, before edging back to 6.26. This move is now inflicting huge and mounting losses on highly-leveraged speculators, forcing them to sell (mainly Chinese) shares and, especially, commodities such as copper, iron and silver that they have hoarded using borrowed money.

In short, the implications of the yuan’s rise are massive and global. That’s why you need to know how the yuan is doing today.

About the Author

- About Pinchas Landau is an economic and financial analyst, serving as a consultant to major financial institutions in Israel and abroad on domestic and global developments. After working in banking and investment, he moved to journalism in 1983 and served as financial correspondent of the Jerusalem Post and then as senior columnist for Globes, Israel’s business daily. He has written for many international newspapers, including the Wall Street Journal and Barrons, as well as numerous professional publications. Since 1996, Pinchas has been writing and publishing The Landau Report, a unique newsletter service which analyses economic, business and financial trends in Israel, as well as tracking Israeli and regional geo-political affairs and has attracted a global subscriber base. He has also been providing quarterly and annual reports on Israel for the Economist Intelligence Unit for 25 years. Landau is also an accomplished speaker, lecturing in English and Hebrew to audiences in Israel and overseas on a range of issues relating to Israel and the Jewish world. Born in London and educated at the London School of Economics, he and his family have been living in Jerusalem since 1976.

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