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The Chinese central bank’s doubling of the trading band on the
Yuan/U.S.$ exchange rate to 1.0% as of today has been greeted by general enthusiasm and is seen as a very significant move on China’s part for a number of reasons. Let me explain. Words: 772
So says Ian R. Campbell (www.StockResearchPortal.com) in edited excerpts from his synopsis and review (a component of a subscription service but presented here with his kind permission for posting on www.munKNEE.com – Your Key to Making Money!) of 5 articles on the subject. This paragraph must be included in any article re-posting to avoid copyright infringement.
Campbell goes on to say, in part:
Without continued China economic growth at high levels developed country economic growth and recovery is less likely and currency exchange rates play a part in this.
Below is my synopsis of the major points of the 5 articles* referenced at the end of this commentary.
Synopsis
- Beijing must believe “that China’s economy, although cooling, is sturdy enough to handle important, long-promised, structural reforms”…
- while a larger trading band will not necessarily lead to a stronger currency, having a currency that trades with fewer restrictions enhances the chance of China succeeding in its vision of Shanghai being a global banking hub by 2020;
- China wants the Yuan to rival the U.S.$ as the global reserve currency…(Last month China gave permission to firms across China to pay for imports and exports in Yuan. This is a material change from the currency control methodology that enabled the Chinese government to accumulated its vast horde of U.S. and other foreign currencies and is an indicator that China is maturing as an economy, and may negatively impact the market for U.S. Treasuries. This is something to watch for.);
- a more flexible Yuan helps China in ‘turbulent times’ by better enabling it to “guide the currency lower to aid exports”…
- this announcement “is all about macroeconomic flexibility in an economy that, by the end of the decade (2020), is likely to be on a growth trajectory towards 5 percent and where that flexibility is going to be needed even more”;
- this announcement “sets the scene for better quality (China) growth in the next decade; and,
- economists believe China’s “tightly controlled export and investment-driven growth model” is unsustainable…
- Christine Lagarde, Managing Director of the International Monetary Fund, weighed in on China’s policy change, saying: “I would like to welcome this important step by the People’s Bank of China to increase the flexibility of their currency. This underlines China’s commitment to rebalance its economy toward domestic consumption and allow market forces to play a greater role in determining the level of the exchange rate.”
- [The White House reacted cautiously with Ben Rhodes, the deputy national security advisor, telling reporters on the sidelines of a regional summit in Colombia: “They’ve made some progress but we’d like to see the Chinese take more of these steps to bring their currency more in line with the market value.”]
Comments
China has a strong interest, in the face of developed country economic difficulties, in… ensuring, to the extent such a thing is possible, that consumers in the U.S., and other developed countries continue to spend on products manufactured in China. Consider in this regard…that:
- China’s factory sector that depends directly on foreign trade is estimated to employ 200 million people. That number is about 60% of both the U.S. and Eurozone total (including children) populations. The U.S. and Eurozone populations are almost identical in size, with each being home to about 330 million people, and,
- China’s consumer consumption represents about 30% of its GDP, whereas U.S. consumer consumption is said to represent about 70% of its GDP. In Q4 2011 Eurozone consumer consumption appears to be in the order of 53%.
Neither China nor any other country does things altruistically…Arguably, this Chinese currency policy change will tend to contribute to:
- consumers in the developed countries continuing to spend at what likely are, and likely will prove to be, unsustainable levels; while
- buying China further time to build its own internal consumer base.
In other the words, this currency change, in part, can be seen as China’s contribution to adding some glue to the can that keeps getting ‘kicked down the road’.
*Referenced Articles:
1. China gives currency more freedom with new reform Source: Reuters, Koh Gui Qing, April 14, 2012 Reading time: 4 minutes, thinking time longer
2. China moves on currency after growing US pressure Source: The Telegraph, April 14, 2012 Reading time: 2 minutes
3. Analysis: China currency move nails hard landing risk coffin Source: Reuters, Nick Edwards, April 15, 2012 Reading time: 4 minutes
4. China’s Domestic Consumption Ambitions Source: Profit Confidential Blog, George Leong, April 13, 2012 Reading time: 3 minutes
5. Statement by IMF Managing Director Christine Lagarde on the People’s Bank of China Exchange Rate Action Source: International Monetary Fund, April 14, 2102 Reading time: 1 minute.
(The above is just one of many of Stock Research Portal’s daily commentaries, critiques, ‘Think for Yourself’ challenges and daily ‘Speak For Themselves’ World Headline summaries. Subscribe now to receive our full, unabridged newsletter.)
Ian R. Campbell, FCA, FCBV, is a recognized Canadian business valuation authority who shares his perspective about the economy, mining and the oil & gas industry on each trading day. Ian is the founder of Stock Research Portal, which provides stock market data, analysis and research on over 1,600 Mining, Oil and Gas Companies listed on the Toronto and Venture Exchanges and can be contacted at icampbell@srddi.com.
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Editor’s Note: The above article has been has edited ([ ]), abridged (…), and reformatted (including the title, some sub-titles and bold/italics emphases) for the sake of clarity and brevity to ensure a fast and easy read. The article’s views and conclusions are unaltered and no personal comments have been included to maintain the integrity of the original article.
Other Campbell Commentaries:
Please read the referenced articles below with an open mind, and only then reach your own conclusions. [Yes, you are being challenged again to ‘think for yourself’ – and invest accordingly.] Words: 699
2. Campbell’s Challenge: ‘Think for Yourself’ When Reading This Article on Gold!
It doesn’t take a rocket scientist to figure out that the technical picture for gold has been rapidly deteriorating…and a look at the longer term charts makes it clear that we have just witnessed a head and shoulders formation that has dramatically failed. The chip shot on the downside for gold here is $1,500 [maybe even] $1,450. Bring a double dip scare for the economy into the picture, which I expect to see this summer, and $1,100 is a possibility. If you get a real stock market crash in 2013, as many analysts are predicting, and you’ll get another chance to buy at $750. [That being said,] long term, I still like gold and expect it to hit the old inflation adjusted high of $2,300 during the next hard asset buying binge – but remember also that long term, we are all dead. Words: 900
3. Another ‘Think for Yourself’ Challenge from Ian Campbell on Gold
Below is a synopsis of, and comments on, a very well balanced article on physical gold which is rather rare in this day and age. The article challenges everyone who owns gold, or is considering owning gold, to think for themselves, and then come to their own conclusions as to whether physical gold is, indeed, the ultimate inflation hedge that it is so often claimed to be. Words: 800
When forecasting, many economists and commentators fail to focus on the dramatic change in inter-country dependence in our ever more globalized world…and fail to let the actual markets influence their views. Below I critique two articles, rationalizing what they see for the price of gold for the balance of 2012. Words: 730
5. Campbell: Balanced Opinions Regarding Gold & Silver are Paramount – Here’s Why
If you hold, or are considering holding, physical gold or silver or both, [it is imperative that you] read as many ‘balanced opinions’ as you possibly can with respect to ownership of each. [Here’s why]. Words: 337
6. Busy? Here Are Today’s Five ‘Speak For Themselves’ Headlines
The 5 headlines below have been personally filtered this morning from over 1,200 articles canvassing economic and resource news. Reading these headlines will keep you well informed and save you time in the process. Links are included for access to each article should you wish to explore a topic more fully. Words: 285
The 8 headlines below have been personally filtered this morning from over 1,200 articles canvassing economic and resource news. Reading these headlines will keep you better informed, and will save you time. If you are so inclined you can read the full articles using the links provided. Words: 608
8. Save Time: Read Today’s ‘Speak For Themselves’ Headlines
Why Focus On These Headlines: This morning I have personally filtered them from over 1,200 articles covering the latest important economic and resource news. My intent is to help you be better informed while saving you time. Below are 5 such headlines with a brief overview.