http://www.forexconspiracyreport.com/will-lower-interest-rates-weaken-the-yuan/ Will Lower Interest Rates Weaken the Yuan The Central Bank of China surprised everyone with an interest rate cut. This was done in response to a slowing Chinese economy, worrisome real estate bubble and a generally high debt load carried by Chinese companies. The question we raise is will lower interest rates weaken the Yuan? The Taipei Times thinks that was the point. The Times believes that the Central Bank of China wants to soften the Yuan. China’s surprise interest rate cut is another step toward softening the country’s exchange rate, setting the yuan on course to end the year lower for the first time since its landmark revaluation in 2005. The People’s Bank of China (PBOC) cut one-year benchmark lending rates on Friday, a move celebrated by Chinese corporations struggling against a toxic combination of high debt load and weak end demand. Analysts say it could also signal the end of a rally in the yuan since May, especially if the central bank follows up with a cut to reserve requirement ratios, which would flood money markets with cheap yuan. How long and far lower interest rates weaken the Yuan remain to be seen. China has to deal with the fact that their years of stellar growth are coming to an end. Economists believe that by 2020 China will be happy with a 4% per year growth rate bringing it closer to what is the norm in North America and Europe. Real estate is overpriced in China and the collapse of the real estate bubble could be disastrous. Lowering rates will take pressure off Chinese businesses and make Chinese products cheaper to the world. A weaker Yuan may be what China wants in the end. A Careful Goldilocks Approach There is a risk of Forex traders and investors fleeing the Yuan causing significant depreciation of the currency. The Economic Times notes that there is increasing market caution regarding the Yuan. China’s yuan stuck close to the official guidance rate for a second day on Tuesday as investors weighed how the recent monetary easing might impact the exchange rate. By midday, spot yuan had rebounded from early losses to stand at 6.1405 per dollar, 0.02 per cent stronger than Monday’s close The People’s Bank of China (PBOC) fixed the yuan’s daily midpoint at 6.1390 per dollar, up 0.05 per cent from previous day’s fix. Traders and economists believe the PBOC will attempt to preserve general exchange rate stability through the midpoint, to risk setting off a panic depreciation, but the market may be preparing to start consistently pricing the yuan weaker than the midpoint. The Central Bank of China sets guidance ranges for currency trading in order to maintain a stable market. This is similar to the circuit breaker rules in US stock exchange that simply stop trading if daily movement is excessive.

2. The Central Bank of China
surprised everyone with an interest
rate cut.

3. This was done in response to a
slowing Chinese economy,
worrisome real estate bubble and
a generally high debt load carried
by Chinese companies.

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5. The question we raise is will lower
interest rates weaken the Yuan?

6. The Taipei Times thinks that was
the point.

7. The Times believes that the
Central Bank of China wants
to soften the Yuan.

8. China’s surprise interest rate cut is
another step toward softening the
country’s exchange rate, setting
the yuan on course to end the
year lower for the first time since its
landmark revaluation in 2005.

9. The People’s Bank of China
(PBOC) cut one-year benchmark
lending rates on Friday, a move
celebrated by Chinese
corporations struggling against a
toxic combination of high debt
load and weak end demand.

10. Analysts say it could also signal
the end of a rally in the yuan since
May, especially if the central bank
follows up with a cut to reserve
requirement ratios, which would
flood money markets with cheap
yuan.

11. How long and far lower interest
rates weaken the Yuan remain to
be seen.

12. China has to deal with the fact
that their years of stellar growth
are coming to an end.

13. Economists believe that by 2020
China will be happy with a 4% per
year growth rate bringing it closer
to what is the norm in North
America and Europe.

14. Real estate is overpriced in China
and the collapse of the real
estate bubble could be disastrous.

15. Lowering rates will take pressure
off Chinese businesses and make
Chinese products cheaper to the
world.

16. A weaker Yuan may be what
China wants in the end.

17. A Careful Goldilocks
Approach

18. There is a risk of Forex traders and
investors fleeing the Yuan causing
significant depreciation of the
currency.

19. The Economic Times notes that
there is increasing market
caution regarding the Yuan.

20. China’s yuan stuck close to the
official guidance rate for a
second day on Tuesday as
investors weighed how the recent
monetary easing might impact
the exchange rate.

21. By midday, spot yuan had
rebounded from early losses to
stand at 6.1405 per dollar, 0.02 per
cent stronger than Monday’s
close.

22. The People’s Bank of China
(PBOC) fixed the yuan’s daily
midpoint at 6.1390 per dollar, up
0.05 per cent from previous day’s
fix.

23. Traders and economists believe
the PBOC will attempt to preserve
general exchange rate stability
through the midpoint, to risk
setting off a panic depreciation,
but the market may be preparing
to start consistently pricing the
yuan weaker than the midpoint.

24. The Central Bank of China sets
guidance ranges for currency
trading in order to maintain a
stable market.

25. This is similar to the circuit breaker
rules in US stock exchange that
simply stop trading if daily
movement is excessive.

26. Not too hot, not too cold and just
right seems to be the approach of
the central bank to avoid
excessive weakness of the Yuan
at a time when low interest rates
are needed to deal with internal
Chinese economic issues.

27. How Weak Might the Yuan
Become?

28. Just how bad could it get if the
central bank cannot limit a grand
exodus from Yuan holdings?

29. An article in Reuters notes
that more volatility could been
seen in the Yuan.

30. Investors have long been
attracted to yuan-denominated
assets, seen as relatively safe
given implicit government
guarantees, and at the same time
higher yielding than similarly rated
dollar-denominated instruments.

31. These high yields, along with the
prospect of forex appreciation,
encouraged speculative “hot
money” to flow into China
maintaining upward pressure on
the exchange rate.

32. Friday’s rate cut now reduces the
relative attractiveness of the yuan
and makes it more risky to hold
going forward.

33. The weakness of the Yuan
coupled with the increasing
attractiveness of the US dollar
could lead to flight of capital.

34. China is stuck between a rock
and a hard place as they have to
reduce rates and they cannot let
the Yuan slide excessively.