Saturday, April 3, 2010

Chinese Yuan the Latest Scapegoat

William Buckler, The Privateer.
The Privateer is an excellent bi-monthly economic publication out of Australia which we highly recommend. Please note we do not receive any compensation from Mr. Buckler for our recommendation. Enclosed is an small extract on the Chinese Yuan from William Buckler's most recent report.

[A headline] which appeared in a leading US financial [journal] said it all: “China in Midst of ‘Greatest Bubble in History’” According to the article, the Chinese problem was all to do with its “overvalued” currency, the Yuan.
The article maintained that the Chinese central bank had been buying US Dollars and selling its Yuan to prevent the Yuan from strengthening against the US Dollar. That had driven its foreign reserve holdings to the unprecedented heights they have reached today.
The Chinese central bank tightened the “peg” between the Yuan and the US Dollar in July 2008 - less than two years ago. In the three years before July 2008, the Yuan rose by 22 percent against the US Dollar. The Chinese complained, but not vociferously, about this. Had the US Dollar risen to that extent against the Yuan, the political outrage from Washington DC would have been heard on the planet Mars.
At the end of July 2008, the US Dollar turned around and began the huge deleveraging rally which saw the USDX climb from 72.00 in July 2008 to 89.20 by early March 2009. Had the Chinese not kept the Yuan/US Dollar exchange rate flat - thereby locking in the 22 percent gain its currency had made against the $US over the previous three years - the screams out of Washington would have been just as loud. To give an example of what happened to other currencies during this period, the Aussie Dollar plummeted from $US 0.98 to $US 0.63 between July 2008 and early March 2009. It has since got most of that back.
The problem for the global financial system is that China has taken over the role that Europe had in the 1960s and ‘70s and that Japan had in the 1980s-mid ‘00s when they were recycling their trade surpluses back into US Dollars by buying Treasury debt paper. Since then, the Chinese have come to the fore in this practice and so have become the scapegoats for the unwillingness of the US Treasury and central bank to prop up their own currency. Somebody “else” has to do it, the US refuses to raise rates or stop borrowing. And even if they wanted to, the US cannot intervene on the currency markets. They have very little in the way of foreign reserves.
The US has been exporting their “inflation” (the creation of ever more US Dollars) for over half a century. But never have they been so dependent on one nation for their consumer goods as they have been on China for most of the past decade. The result has been a huge pile of $US “reserves” in the Chinese central bank with the consequence of a huge artificial “boom” in the Chinese economy. History has merely repeated itself, albeit on a much larger scale. As was the case for the Deutschmark and after it the Japanese Yen, the Chinese Yuan is the latest scapegoat.
[And] just in case the ratings agencies’ induced “crisis” in Europe is not a sufficient distraction, the US powers that be are preparing another one. On March 15, one hundred and thirty Congressmen signed a letter addressed to Treasury Secretary Geithner in which they made known “our serious concerns about China’s continued manipulation of its currency”. Really, the lengths that “lawmakers” are going to in the US is becoming something beyond surreal. Consider this quote from the letter: “China’s exchange rate misalignment threatens the stability of the global financial system by contributing to rampant Chinese inflation and accumulation of foreign reserves” (emphasis by The Privateer). If the Chinese don’t continue with their “accumulation of foreign reserves”, who will? The Fed, perhaps??

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