Tags: China | Yuan | Sure | Bet

China’s Yuan Isn’t the Sure Bet It Used to Be

Monday, 19 Dec 2011 08:37 AM

By Sean Hyman

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During the past five to six years that the Chinese yuan has been floating within a controlled band, the yuan has largely appreciated against the dollar.

Sometimes it’s been slow, and we hear politicians gripe about that all the time like that’s the “one” problem with the world.

But in 2012, the yuan could actually have a period of time when it loses some strength against the greenback.

You see, formerly, China has been growing at a unbelievably strong rate.
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However, that’s died down quite a bit in the last year or two.

The home values in Beijing just fell 35 percent from the month before, according to their Homelink property website. That’s a big deal.

The Chinese say they can cause their real estate market to have a “soft landing,” but so far I haven’t seen any country be able to do that even though they all act like they can.

The United States couldn’t do it and in the past, and countries like Japan weren’t successful at it either.

Not only are the home values starting to drop quickly but also the M2 money supply slumped to 12.7 percent in November which is the lowest in 10 years.

New lending fell 5 percent on a month-to-month basis in November.

In response to all of this, China has lightened up on their tightening policy on inflation. Chinese officials cut the reserve requirement for their banks and that’s the first time they’ve done that since 2008. But they’re doing that to ease liquidity strains.

Chinese stocks in Shanghai are still taking a beating, too, with their Shanghai stock index being down 30 percent since May and 60 percent off of the 2008 highs.

China is starting to have to take drastic measures that it didn’t have to in the past. One such “drastic measure” lately is the tariffs imposed upon imports of GM cars, for instance,

But I think there will be other drastic measures such as the lowering of the value of their yuan for a period of time. America will not likely be happy with this at all. But honestly, if the crap is hitting the fan, they may have to do that to look out for their own interests.

Two things that tend to make me think this will be the case for the yuan in 2012 are these comments:

Fitch Ratings said that China is hooked on credit, but deriving less of a punch from each dose. For instance, they mentioned that back in 2007, for every dollar lent out they were increasing GDP still by 77 cents on that dollar.

Well in 2011, a dollar in lending is only getting them 44 cents in GDP from that dollar. So they’re getting less and less “bang” for their lending capacity all the time. Eventually, that’s got to come home to roost. And I think that could be sooner rather than later at this point.

The other comment that leads me to think that China will take its yuan lower in 2012 was the comments from a former central bank rate-setter, Li Yang.

Yang said that, “Our foreign reserves are basically falling every day.” Well, that’s a new thing because the trend was that they were gaining foreign reserves consistently for years on end!

So there are some things changing in China right now. They’ve had a heck of a run in recent years moving up to the second-largest economy in the world.
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However, they may have done too much too quickly and I think that could come back to haunt them for a period of time.

In the meantime, none of that is good for China’s yuan and so I think it could actually head lower for most (if not all) of 2012.

And for the first time in a long time, I believe that the buck will gain in value against it. So look for a weaker yuan at least in 2012.

About the Author: Sean Hyman
Sean Hyman is a member of the Moneynews Financial Brain Trust. Click Here to read more of his articles. He is also the editor of Money Matrix Insider. Discover more by Clicking Here Now.



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