So, the Chinese Yuan has increased steadily by 0.2-0.25% a day against the US$, which is extreme. Possible causes:
- The CCP fears that Fed policies will lead to further debasement of the dollar, and thereby further Chinese inflation and asset bubbles when they import from elsewhere.
- Trade surplus came in extremely strong at US$31.5bn and the USA is currently preoccupied with feeling sorry for itself and running up a trade deficit. The tone across the pacific gets softened if China increases the valuation of the yuan.
- They can afford it. Those US$1.16tn in Treasuries look like pure gold at the moment, and now could be a good time to sell or otherwise diversify as they are extremely highly priced. (See earlier post on the S&P downgrade.)
- They ascribe a horribly negative long term outlook on the US economy, and need to hurry up internationalizing the yuan and bring it closer to “fair value”. This is view in some contrast with some analysts interviewed by Bloomberg, but they discuss the short term view – in which I tend to agree with them – and I discuss the long term where China sees the global imbalances exacerbated by the reserve currency status of the US$. Apparently, the CCP has had enough of inflation doing the job for them, so it seems better to turn to the currency exchange rate. They should hurry up their structural currency reforms before the US runs into a debt ceiling mandated by the markets, which could be relatively short given the low average maturity of their debt.
It’s going to be a few interesting days on the markets, and a few interesting years in the world economy…