Best of the Week
Most Popular
1. Investing in a Bubble Mania Stock Market Trending Towards Financial Crisis 2.0 CRASH! - 9th Sep 21
2.Tech Stocks Bubble Valuations 2000 vs 2021 - 25th Sep 21
3.Stock Market FOMO Going into Crash Season - 8th Oct 21
4.Stock Market FOMO Hits September Brick Wall - Evergrande China's Lehman's Moment - 22nd Sep 21
5.Crypto Bubble BURSTS! BTC, ETH, XRP CRASH! NiceHash Seizes Funds on Account Halting ALL Withdrawals! - 19th May 21
6.How to Protect Your Self From a Stock Market CRASH / Bear Market? - 14th Oct 21
7.AI Stocks Portfolio Buying and Selling Levels Going Into Market Correction - 11th Oct 21
8.Why Silver Price Could Crash by 20%! - 5th Oct 21
9.Powell: Inflation Might Not Be Transitory, After All - 3rd Oct 21
10.Global Stock Markets Topped 60 Days Before the US Stocks Peaked - 23rd Sep 21
Last 7 days
Inflation and the Crazy Crypto Markets - 23rd Oct 21
Easy PC Upgrades with Motherboard Combos - Overclockers UK Unboxing - MB, Memory and Ryzen 5600x CPU - 23rd Oct 21
Gold Mining Stocks Q3 2021 - 23rd Oct 21
Gold calmly continues cobbling its Handle, Miners lay in wait - 23rd Oct 21
US Economy Has Been in an Economic Depression Since 2008 - 22nd Oct 21
Extreme Ratios Point to Gold and Silver Price Readjustments - 22nd Oct 21
Bitcoin $100K or Ethereum $10K—which happens first? - 22nd Oct 21
This Isn’t Sci-Fi: How AI Is About To Disrupt This $11 Trillion Industry - 22nd Oct 21
Ravencoin RVN About to EXPLODE to NEW HIGHS! Last Chance to Buy Before it goes to the MOON! - 21st Oct 21
Stock Market Animal Spirits Returning - 21st Oct 21
Inflation Advances, and So Does Gold — Except That It Doesn’t - 21st Oct 21
Why A.I. Is About To Trigger The Next Great Medical Breakthrough - 21st Oct 21
Gold Price Slowly Going Nowhere - 20th Oct 21
Shocking Numbers Show Government Crowding Out Real Economy - 20th Oct 21
Crude Oil Is in the Fast Lane, But Where Is It Going? - 20th Oct 21
3 Tech Stocks That Could Change The World - 20th Oct 21
Best AI Tech Stocks ETF and Investment Trusts - 19th Oct 21
Gold Mining Stocks: Will Investors Dump the Laggards? - 19th Oct 21
The Most Exciting Medical Breakthrough Of The Decade? - 19th Oct 21
Prices Rising as New Dangers Point to Hard Assets - 19th Oct 21
It’s not just Copper; GYX indicated cyclical the whole time - 19th Oct 21
Chinese Tech Stocks CCP Paranoia, VIES - Variable Interest Entities - 19th Oct 21
Inflation Peaked Again, Right? - 19th Oct 21
Gold Stocks Bouncing Hard - 19th Oct 21
Stock Market New Intermediate Bottom Forming? - 19th Oct 21
Beware, Gold Bulls — That’s the Beginning of the End - 18th Oct 21
Gold Price Flag Suggests A Big Rally May Start Soon - 18th Oct 21
Inflation Or Deflation – End Result Is Still Depression - 18th Oct 21
A.I. Breakthrough Could Disrupt the $11 Trillion Medical Sector - 18th Oct 21
US Economy and Stock Market Addicted to Deficit Spending - 17th Oct 21
The Gold Price And Inflation - 17th Oct 21
Went Long the Crude Oil? Beware of the Headwinds Ahead… - 17th Oct 21
Watch These Next-gen Cloud Computing Stocks - 17th Oct 21
Overclockers UK Custom Built PC 1 YEAR Use Review Verdict - Does it Still Work? - 16th Oct 21
Altonville Mine Tours Maze at Alton Towers Scarefest 2021 - 16th Oct 21
How to Protect Your Self From a Stock Market CRASH / Bear Market? - 14th Oct 21
The Only way to Crush Inflation (not stocks) - 14th Oct 21
Why "Losses Are the Norm" in the Stock Market - 14th Oct 21
Sub Species Castle Maze at Alton Towers Scarefest 2021 - 14th Oct 21
Which Wallet is Best for Storing NFTs? - 14th Oct 21
Ailing UK Pound Has Global Effects - 14th Oct 21
How to Get 6 Years Life Out of Your Overclocked PC System, Optimum GPU, CPU and MB Performance - 13th Oct 21
The Demand Shock of 2022 - 12th Oct 21
4 Reasons Why NFTs Could Be The Future - 12th Oct 21
Crimex Silver: Murder Most Foul - 12th Oct 21
Bitcoin Rockets In Preparation For Liftoff To $100,000 - 12th Oct 21
INTEL Tech Stock to the MOON! INTC 2000 vs 2021 Market Bubble WARNING - 11th Oct 21
AI Stocks Portfolio Buying and Selling Levels Going Into Market Correction - 11th Oct 21
Stock Market Wall of Worry Meets NFPs - 11th Oct 21
Stock Market Intermediate Correction Continues - 11th Oct 21
China / US Stock Markets Divergence - 10th Oct 21
Can US Save Taiwan From China? Taiwan Strait Naval Battle - PLA vs 7th Fleet War Game Simulation - 10th Oct 21
Gold Price Outlook: The Inflation Chasm Between Europe and the US - 10th Oct 21
US Real Estate ETFs React To Rising Housing Market Mortgage Interest Rates - 10th Oct 21
US China War over Taiwan Simulation 2021, Invasion Forecast - Who Will Win? - 9th Oct 21
When Will the Fed Taper? - 9th Oct 21
Dancing with Ghouls and Ghosts at Alton Towers Scarefest 2021 - 9th Oct 21
Stock Market FOMO Going into Crash Season - 8th Oct 21
Scan Computers - Custom Build PC 6 Months Later, Reliability, Issues, Quality of Tech Support Review - 8th Oct 21
Gold and Silver: Your Financial Main Battle Tanks - 8th Oct 21
How to handle the “Twin Crises” Evergrande and Debt Ceiling Threatening Stocks - 8th Oct 21
Why a Peak in US Home Prices May Be Approaching - 8th Oct 21
Alton Towers Scarefest is BACK! Post Pandemic Frights Begin, What it's Like to Enter Scarefest 2021 - 8th Oct 21
AJ Bell vs II Interactive Investor - Which Platform is Best for Buying US FAANG Stocks UK Investing - 7th Oct 21
Gold: Evergrande Investors' Savior - 7th Oct 21
Here's What Really Sets Interest Rates (Not Central Banks) - 7th Oct 21

Market Oracle FREE Newsletter

How to Protect your Wealth by Investing in AI Tech Stocks

How Will China Handle The Yuan?

Currencies / China Currency Yuan Sep 01, 2009 - 12:49 PM GMT

By: Mike_Shedlock


Best Financial Markets Analysis ArticleInquiring minds are asking "How Will China Handle The Yuan?"

It's a good question, too. Lance Lewis has a conversation with Professor Ryan Krueger in index/a/24294" target="_blank">How China Will Handle the Yuan describing how it might play out. Please click on the above link for one possibility.

Here is the same conversation except with me replying to Lance instead of Professor Ryan Krueger.

Lance Lewis: You notice the extra chunky volume in the Chinese Yuan ETF (CYB) yesterday at the same time that the dollar reversed violently?

Mish: This violent reversal?

That looks like normal day to day action to me.

Lance: I’m telling ya. Something is up with China and the yuan. It would explain a lot. What if it were close to revaluing against the dollar?

We know it's fed up with funding US debt, but it can’t stop funding it as long as it continues to peg to the dollar and is forced to buy dollars every day in order to hold down the yuan. The US isn’t even its largest export market anymore. The EU is. The US consumer is broke. Why does China need to keep exporting cheap goods to the US if the US consumer can’t buy them anyway?

Now look at the recent market action in August. Normally when Chinese stocks go down, the dollar rallies and commodities get hit, just like in early August when people were betting on “the usual.” But this time, after the initial knee-jerk reaction to Chinese stocks sliding, “the usual” didn’t happen. Oil is now back on its highs. Gold is close to breaking out, and the dollar is back on its low for the year. And all of this is occurring even as Chinese stocks are back on their lows as of last night?

China revaluing the yuan is the only thing that fits, and the US Treasury may even have an inkling that it’s coming, which would explain why Obama suddenly renominated Gentle Ben on a Tuesday in late August when he was supposedly on vacation. Rather odd timing, but not so if the intent was to remove as much uncertainty as possible as to who will be running the Federal Reserve going forward in order to prevent complete panic in the dollar and Treasuries if China were to one day say “I’ve had enough” to buying more dollars and Treasuries every single day in order to hold her dollar/yuan peg.

It’s the only thing that fits. If so, the dollar would get smoked, literally, “overnight” and gold would explode. Bonds would probably get crushed, too.

Mish: No, it's not the only thing that fits. China is printing more RMB (yuan) on a relative basis than the US is printing dollars. It is using that printed money to buy commodities and China is arguably on the verge of overheating.

Moreover, the Baltic Dry shipping index is collapsing. This suggests a weakening of demand for commodities.

Oil is indeed firm, but China has also been stockpiling. How much longer that can go on with little demand for China's exports is anyone's guess.

EU may have passed the US as China's biggest trading partner, but EU consumers are not in such great shape either. For a discussion of

Europe and how it relates to this mess, please see Deflation Is A *****.

Indeed, consumers are tapped out everywhere, and arguably European and Chinese banks are in worse shape than US banks.

Moreover, there is also a not-so-little thing called peak oil that might be keeping oil firm. And it's hurricane season.

The critical issue however, is simple math.

The US runs a trade deficit with China. That means China must accumulate US assets. China does not have a choice in the matter; it is purely a mathematical function. When the US runs a deficit, mathematically someone must run a surplus.

There is no choice in the matter other than to raise the price of goods so high that consumers won't buy them. Pray tell, what would that do to unemployment and civil unrest in China? What would that do to demand in Europe? It is virtually impossible for China to strengthen its currency to the US dollar without affecting every other currency as well.

Some might suggest that China should buy oil with those dollars, but then what would the Mideast exporters do with them?

The reason China is buying fewer US treasuries recently is that the US deficit with China is shrinking. Again this is a simple mathematical equation, not some massive conspiracy to dump the dollar. Of course China could buy US ports and bridges or oil companies instead of treasuries, but such maneuvers have been blocked by Congress and last I checked no ports or bridges are for sale.

Lance: Wal-Mart (WMT) would be in trouble. It probably wouldn’t be able to raise prices on all the cheap Chinese goods, and I’d likely have to just eat it with thinner margins. That would go for a lot of retailers actually, and their pain would be compounded by higher gasoline prices squeezing the consumer even more. What fun we’ll have.

Mish: The whole world is on thinner margins. Deflation has set in and one quarter or two of massive stimulus that is likely to fail sooner rather than later does not change that fact. Deflation is a process that takes years to play out. One or two quarters of rebound means no more to the US than it did to Japan over its two lost decades, now going on three.

In spite of record worldwide stimulus, a global recession is everywhere you look except perhaps in China. The reason is simple. When the Chinese government "suggests" banks should lend, banks lend. This is how command economies "work", using the word "work" loosely. Yes, the US has massive problems, but let's have an honest assessment of problems elsewhere.

Bottom line, China is busy ramping up production for consumers that don't exist: Not here, not in the EU, and not in China (not yet). This love affair with China, a country that will not float its currency or offer freedom of speech, and hides bank solvency issues even more so than the US, is way overdone.

Ironically, over the years, I have been a staunch defender of China, on average. Remind me to reconsider decoupling when China allows freedom of speech and floats the RMB instead of pegging it.

Lance: Question is how smart are the Chinese? Dumb enough to keep printing yuan in order to hold it down versus the tidal wave of dollars that are crashing on her shores, and at the same time fund gargantuan US government-deficit spending out of the kindness of its heart? Or smart enough to say “enough!”

Mish: As discussed above, that tidal wave is a mathematical equation. More importantly, "dumb" might be in the eyes of numerous dollar bears expecting dollar Armageddon vs. Chinese officials fearing social unrest.

Please remember the other side of the coin, namely 10's of millions of workers that China desperately wants to keep employed at nearly any cost to avoid civil unrest. A weak currency helps Chinese exports, thus keeping workers employed.

A 4-Minute Tour of the China Property Bubble

What is China doing with all that printing? Please take a A 4-Minute Tour of the China Property Bubble to find out.

World's Largest Shopping Mall Sits Vacant

The world's largest shopping mall, South China Mall in Guangzhou, China, is almost entirely empty. Click on the link to see a fascinating video.

If you thought Minnesota's Mall of America was the world's biggest shopping center, think again. South China Mall is a Vegas-like spectacle built in 2005 that now sits almost entirely empty. In the current economic climate, could this be a symbol of things to come?

The entire mall sits empty save 10-12 small shops.

Malinvestments and Commodity Prices

Think about all the concrete, steel, copper, and energy it took to build that mall. This is not an isolated case either as the previous 4-minute video shows.

Let's not confuse a renewed crack-up boom in China with a sustainable recovery. And let's not pretend much of this building is anything other than malinvestment.

Decoupling Theories Way Premature

Think about the wages those store owners get. Think about wages in China in general.

For more on wages and malinvestments please see Inside China: A Sculptor's View, an email exchange with Bill Hopen, a sculptor who frequently travels to China, often for months at a time. That post and the above videos should help open eyes.

Decoupling theories are very premature, at best.

What Would Happen If China Floated The RMB?

Yes, the US is printing. However, please remember that China, the UK, and most other countries are too. And on a relative basis, China's stimulus package is greater than the US stimulus package.

It's relative differences in printing and other such factors that will help determine currency trends. And as much as commentators pick on US stats like GDP, mark to market accounting, off sheet balances, etc, bear in mind we have far less believable data on China.

For starters, Chinese GDP numbers are simply bogus.

Professor Vitaliy Katsenelson has discussed that idea on several occasions including China's Growth an Accounting Miracle.

Once China had announced its 8 percent growth target, it began to disburse funds directed at a sharp increase in public works spending. It is important to understand that the disbursal of funds is recorded as GDP growth. So the government can easily control the pace of growth by the pace at which it releases funds that have already been allocated in the stimulus package to the creation of higher production or growth numbers. Funds disbursed for fixed-asset investment by state-owned enterprises or provincial governments are counted as having been spent when they are disbursed.

.... I am not convinced China will have inflation in the long-run. It appears that deflation is a more likely scenario as China is ridden with overcapacity – the country was geared for much higher global growth. I can, however, see inflation erupting in a very short timeframe as money has been thrown at the consumer/companies, and we are seeing this in the stock market and real estate. But in the long run, inflation appears an unlikely outcome: overcapacity and slower demand from the US and Europe will force Chinese producers to cut prices to increase utilization and stimulate demand.

And finally, I'm sure China doesn’t want the renminbi to be the world’s currency as it would drive up the value – a suicide for an export-based economy.

Professor Katsenelson was discussing China: Bogus Boom? by John Makin. It's a real gem, and well worth a look.

For all the complaints about US banks hiding things (and yes US banks are hiding things massively so), at least we have balance sheets and footnotes to look at and decipher. Can we say the same about China?

US banks are in trouble, but it is a huge mistake to think Chinese banks are in better shape.

I repeat my comment made earlier: When the Chinese government "suggests" banks should lend, banks lend. This is how command economies "work", using the word "work" loosely. Yes, the US has massive problems, but let's have an honest assessment of problems elsewhere.

In light of the above, if China floated the RMB while giving an accurate assessment of its GDP and the true state of affairs with its banks, the RMB might crash.

How would China handle that? Better yet, how would the world handle that?

Such fears are the most likely reason behind China's currency peg in the first place. Yes, China is taking steps towards floating the RMB, but China seldom rushes into things, often taking years or even decades to make major policy shifts.

Gold Seasonality And Fundamentals

By the way, I happen to agree with professor Lewis that gold seasonality is favorable. I agree with him that the intermediate to long-term fundamentals for gold are positive. We simply differ as to what those fundamentals are.

At times, in unfavorable seasonality gold has rallied. At times it doesn't. And please don't think that gold does well in times of inflation and deflation because it doesn't. Proof is simple: There was inflation every step of the way from 1980 to 2000 with gold dropping from 850 to 250 while every other asset class soared.

Gold does well in times of credit stress (stagflation, hyperinflation, or deflation). I think we can all agree (one way or another) that this has been a period of high credit stress.

Short-term I do not know, nor does anyone else what gold will do. Last year at this time, in spite of favorable seasonality gold sold off. However, unlike most other commodities, gold regained nearly everything it lost. Are we in for a repeat? No one really knows.

However, should a dollar crash occur and gold soar, given that I own gold I would benefit. On the premise that gold is money and gold should do well in deflation, I did expect gold to hold up well and it did.

Prechter, who does not view gold as money, thinks gold will collapse. Thus, not all deflationists think alike.

This post is long enough. Inquiring minds may wish to consider Countdown To Dollar Implosion Madness for a discussion of how trade deficits affect the situation.

Key Take-Aways From The Discussion

1) China will act in China's best interest.
2) China, not US market theorists will make the decision. That decision is not so clear cut once one looks at both sides of the coin.
3) China tends to move slowly in such decisions.

Regardless of what happens, dollar-crash theories involving China and BRIC mandates, secret meetings, and other speculation are getting a bit out of hand in numerous places. There are easily two sides of the coin (if not more), and China is apt to move slowly whichever way it moves.

By Mike "Mish" Shedlock

Click Here To Scroll Thru My Recent Post List

Mike Shedlock / Mish is a registered investment advisor representative for SitkaPacific Capital Management . Sitka Pacific is an asset management firm whose goal is strong performance and low volatility, regardless of market direction.

Visit Sitka Pacific's Account Management Page to learn more about wealth management and capital preservation strategies of Sitka Pacific.

I do weekly podcasts every Thursday on HoweStreet and a brief 7 minute segment on Saturday on CKNW AM 980 in Vancouver.

When not writing about stocks or the economy I spends a great deal of time on photography and in the garden. I have over 80 magazine and book cover credits. Some of my Wisconsin and gardening images can be seen at .

© 2009 Mike Shedlock, All Rights Reserved

Mike Shedlock Archive

© 2005-2019 - The Market Oracle is a FREE Daily Financial Markets Analysis & Forecasting online publication.


24 Nov 10, 06:42
South china mall

Twice i was in south china mall in 2008 but still it remains as same as when it looked before most of the space are empty. But good looking place to be sure everyone should visit south china mall once.

Post Comment

Only logged in users are allowed to post comments. Register/ Log in