Why I’m Bearish on the Chinese Yuan

The global financial world, for the most part, remains very bullish on the Chinese currency, commonly known as the “yuan”.  Through purported “loosening” — a process where China’s all-controlling central bank trickles a bit of free market freedom into the artificially-priced currency — conventional thinking in currency circles would lead one to believe that it will rival the dollar as a global currency sometime soon.  Before I tell you why I don’t believe that can happen, let’s take a Wiki Moment to explain the yuan:

Got that?  Quiz at the end, you know…(-;

Since there are about 1000 online blogs by qualified experts each of which explains in great detail why the yuan is going to take over the world, all written by men and women who understand currency markets infinitely better than this immigration attorney, why am I even writing this, you ask?  Two reasons:

Just last week Reuters in Shanghai reported that the People’s Bank of China continued its trend of fixing stronger yuan midpoint against the dollar for the third straight trading day, “with spot prices posting their strongest close since late May following a dramatic overnight plunge in the dollar index.”  The article mentions that “Chinese leaders, facing intensified concern that the domestic economy is having difficulty weathering sustained weakness in its exports markets, have said that Beijing will take steps to support exporters, which many interpreted as an official endorsement of a weakening trend in the yuan.”  Simulataneously,  Guo Jianwei, deputy director of the central bank’s monetary policy department, said the yuan’s yo-yoing “had reduced the incentive for speculators to go long on the yuan on the assumption the only direction it could go was up.”  But here’s the problem: while the People’s Bank of China can mimic the Fed, unlike the Fed, the PBC is there only to implement the will of the Government of China.  There is no voice for the private sector in China’s management of its monetary policy, PERIOD.

Although the bulk of the aforementioned online commentary is a servile repetition of what the Chinese Central Bank wants the world to believe, cracks are appearing.  On August 28, the Wall Street Journal published a telling article about China Construction Bank, the country’s 2^nd largest in assets, which has seen a vast rise in nonperforming loans and has rolled over 8 billion yuan ($1.26 billion) in just first half of this year.  I’m not money trader, but does that sound to you like a currency ready to export?  The truth is that the chaos of the Euro, still undefined and very volatile for the foreseeable future, is the main reason the West is buying into this new “globalization” of a tightly-regulated currency whose leash can be summarily tightened just as fast or faster than it has been loosened.    (Moreover, China funneled over $20B into Europe the first half of this year, much to their concern and chagrin.)  The second reason we in the West buy into this “yuan as dollar/euro” bit is the sheer economic might of China as the world’s major production powerhouse. 

I’ve told you about Mr. Bo’s Wild Ride and the various other factors which have affluent Chinese extremely nervous and looking abroad more and more.  And I  haven’t even gotten to tell you about this past weeks “Now you see me, now you don’t” disappearances/reappearances of China’s presumed next leader, Xi Jinping, a Chavez/Castro-like set of maneuvers which has China’s business leaders wondering what on earth is happening even as the most significant and unusual change in party leadership looms just months ahead.

For now, I’d hang on to my U.S. dollars if I was a currency trader.  The short term gains smell more like the Facebook public offering, a greed-driven, wheel-and-deal situation which is the operational opposite of the climb of the mighty Apple.  The world is still reeling from the revelation as to the UK banks’ hijinks in manipulating the Libor; compared to the absolute governmental policy driving the valuation of the yuan, the Libor scandal barely registers in terms of global currency manipulation.

China has much to offer the world in terms of productivity and manufacturing leadership, but the U.S. manufacturing sector — led by the stunning, yet-unnoticed cost reductions in advanced robotics which allowed President Obama’s auto industry bailout to result in a happy ending (who knew??) — will be giving China a run for its manufacturing money in the coming decade.  Perhaps one day the yuan will be akin to the U.S. and Canadian dollar, to the pre-chaos Euro, or to the pound sterling.  But that day is anywhere but near.