Why the Chinese Yuan Is Falling

Why the Chinese
Yuan Is Falling
By www.ForexConspiracyReport.com

http://www.forexconspiracyreport.com/why-the-chinese-yuan-is-falling/
Markets reacted negatively when Apple
announced that iPhone sales in Greater
China (China, Hong Kong, Taiwan) are
going to fall.

Investors and traders are taking this
news as an indication of economic
deceleration in China.

Forex traders see this as an indication
of why the Chinese yuan is falling.

Chinese Currency
Manipulation

President Trump has accused China of
manipulating its currency in order to
maintain a trade advantage with the
USA.

He is not the first to say this and China
is not the first nation to keep its
currency weak in order to increase
exports to the USA and elsewhere.

Japan, Taiwan, South Korea, and others
paved the way for this approach before
China entered the picture.

China finds it easier to manipulate its
currency versus the USD because the
yuan does not trade freely in Forex
markets.

Nevertheless, China contends, always,
that this is not true and that it merely
acts to keep the yuan stable as
opposed to working to drive its value
artificially lower.

How Is the Value of the Yuan
Set?

Every day the central bank of China
sets a target range within which the
yuan may trade, which in turn signals
the market as to which direction it
wishes the yuan to go.

These days the trading range is
hovering around 7 yuan to the US
dollar.

That is as low as it was ten year ago at
the beginning of the financial crisis.

Although there is nothing special about
the seven to one exchange rate it has
psychological significance, especially
due to the number of Chinese taking
money out of the country.

As the yuan promises to keep heading
downward the folks who have made
millions in the Chinese economic
miracle are hedging their bets by
moving money and purchasing
property or businesses offshore.

This capital flight threatens to undercut
the Chinese economy just at it is
weakening.

USD RNB Exchange Rate

Courtesy of Bloomberg and the BBC
this graph illustrates the movement of
the yuan versus the dollar over the last
decade.

The exchange rate briefly fell to the
seven to one level during the last
presidential election campaign when
Trump accused China of being a
currency manipulator.

Then it backed off as nothing came of
the remarks.

Now, however, the burgeoning trade
war is taking a bite of China’s economy,
Chinese national debt is rising, and the
yuan seems to be in free fall.

It is not the current exchange rate that
is as important as the direction of the
trends with is the yuan going steadily
downward.

Why the Chinese Yuan Is
Falling

The initial take on the US dollar and a
trade was that the dollar would suffer
but it did not work out that way.

The trade war as served to help the US
dollar and hurt the yuan.

The bottom line is that the US Federal
Reserve raising interest rates is driving
the dollar up and a weakening
economy is driving the yuan down.

This has forced the Chinese Central
Bank to repeatedly reset its trading
range toward an ever-weaker yuan.

While the US economy is running at full
employment the growth of the Chinese
economy is at its worst since 2009.

This divergence of economies has led
to a divergence in currencies as well.

How Long Will the Trade War
Last and How Bad Will It Get?

The initial take on the trade war was
that it would be resolved rather
promptly.

But, both sides are digging in, seeing
this is a make or break point for both
nations.

The issue is especially critical for China
as the changes they could be forced to
make could be a threat to Communist
Party control as we noted in our article
about whether or not China can make
the changes necessary to end the trade
war.

Only one of the factors in resolving the
trade war will be the USD RNB
exchange rate.

In the meantime the USA will be
ramping up tariffs on Chinese products.

China will reciprocate. But, since the
USA imports substantially more from
China that it exports to China the only
way this can go is a loss for China.

As China’s economy suffers and people
are out of work this will become an
economic and political threat the rulers
of China, the Communist Party.

The “social contract” in China is that
the people tolerate an excessive level
of control over their lives in return for a
growing economy, work, and the
promise of a better future.

If and when the Party is unable to
deliver on their side of the implicit
bargain there will be (and already is)
social unrest.

The only way that the Communist Party
knows how to respond is to crack down
as they did on the demonstrations in
Tiananmen Square so many years ago.

The best hope or a decent resolution to
the trade was is that the rulers of China
need to avoid further economic and
social disruption at all costs.

Why Does Apple Affect China?

Apple announces that iPhone sales will
be off in China and its stock falls.

That makes sense. But, why do tech
stocks fall throughout Asia and why do
Asian currencies take a hit?

Apple’s supply chain includes
companies in Mainland China and in
Taiwan so it makes sense that these
companies will be hurt by lower iPhone
sales.

But, lower iPhone sales in China are
also being seen as in indication of less
purchasing power by the Chinese
which would be an early indication of a
recession.

It is the suggestion of Chinese buyers
cutting back on their purchases that
has scared investors in regard to
Chinese companies and their stocks.

None of this is helped by the raising
level of Chinese debt and this is a big
part of why the yuan is falling.

Over the long run China is likely to seen
its economy cool off.

The same is true of any growing
economy.

There is always a limit to growth. How
China handles that will determine if
they have a bright future or a hard
landing.

Why the Chinese Yuan Is Falling

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Why the Chinese Yuan Is Falling