China Games the G-20 Meeting.
One day after President Obama released a G-20 letter demanding changes to China’s currency peg to the US dollar, China said yesterday that they might do just that, although not with a one off revaluation or major Yuan appreciation. Below Reuters covers China’s change of heart. Below that, be careful what you wish for says Professor Roubini. If China fixes to a basket of currencies with a high weighting to the Euro, the Yuan might start falling with the Euro against the dollar. The Yuan might devalue instead of appreciate. Besides, if China’s Yuan did appreciate in a large meaningful way, a change in their trade surplus would reduce their need to buy US sovereign debt. The Fed would have to monetize it instead. That in turn would probably rocket the US into the lead again, leapfrogging Britain, the EU and Japan in the race to achieve Iceland status, as our unstable, dysfunctioning, fiat dollar reserve standard lost any remaining money function as a safe haven and store of value. Hyperinflation would be just months away. Stay long precious metals. China seems to be gaming President Obama and the coming G-8 and G-20 meetings.
Peg is dead as China vows Yuan flexibility before G20
(Reuters) - China said on Saturday it would gradually make the Yuan more flexible, in a gesture that may deflect foreign criticism at next week's G20 summit but will not quickly yield a big move by its currency.
President Barack Obama, who prodded China over the Yuan in a letter released on Friday, welcomed the news in an indication the danger of a market-roiling confrontation at the Group of 20 meeting in Canada had eased.
"China's decision to increase the flexibility of its exchange rate is a constructive step that can help safeguard the recovery and contribute to a more balanced global economy," Obama said in a statement.
Other Western leaders and the International Monetary Fund also voiced encouragement that an important strategic ally was making a concession which improves the chances of success at the June 26-27 summit.
But the announcement by China's central bank, which strongly suggested it was ready to break the currency's 23-month-old dollar peg, was conditioned by an explicit warning ruling out a one-off revaluation or major Yuan appreciation
"The basis for large-scale appreciation of the RMB exchange rate does not exist," the People's Bank of China said.
The Yuan is also known as the renminbi, or RMB.
Analysts were broadly positive about the news but cautioned that China, the largest holder of U.S. sovereign debt, may reduce its demand for those securities in the future. China buys U.S. bonds to manage the Yuan's peg to the dollar, and greater currency flexibility may dilute that necessity.
The peg, which Beijing defended as a source of stability during the recent global financial crisis, has come under intense criticism from abroad as China's export juggernaut roared back to life.
Much of the rest of the global economy remains sluggish and beset by unemployment in the wake of the financial crisis, and China's policy is seen as stealing jobs from foreign markets.
In particular, by keeping the Yuan artificially cheap against the dollar, China makes its imports more attractive for U.S. consumers while making U.S. exports to China more costly.
That has contributed to a massive surplus in China's trade account with the United States, sparking protests that the policy is at the direct expense of American jobs.
http://www.reuters.com/article/idUSTRE65I11B20100619
China forex move could thwart U.S. hopes - Roubini
Sat Jun 19, 2010 4:49pm EDT By Walden Siew
June 19 (Reuters) - China's decision to move away from its currency peg might mean the yuan weakens against the dollar instead of strengthens as Washington wants, Nouriel Roubini, one of Wall Street's most closely followed economists, said on Saturday.
China said on Saturday it would gradually make the yuan more flexible after pegging it to the dollar for nearly two years, a move that the U.S. government and others around the world have long been calling for.
"This is the first significant signal in years of a change in Chinese currency policy," Roubini, best known for having predicted the U.S. housing meltdown, told Reuters.
But it remains to be seen how China would put the new system into practice including the composition of a basket of currencies that Beijing will use as a reference point for the yuan -- also known as the renminbi -- and the base date for that basket, he said in an e-mail.
"Since they have not changed the previous range for the band -- plus or minus 0.5 percent -- most likely on Monday China will allow the renminbi vs U.S. dollar to move," said Roubini.
The yuan has risen sharply in recent months against the euro, which sank over Europe's debt problems, so a stronger yuan could not be taken for granted, he said.
If the euro were to continue to depreciate, "the renminbi would have to be allowed to depreciate relative to the dollar, a paradoxical outcome," Roubini said.
His comments echoed those of an adviser to China's central bank on Saturday.
Li Daokui, an academic adviser to the monetary policy committee of the People's Bank of China, told Reuters in Beijing that the yuan could depreciate against the dollar if the euro falls sharply against the U.S. currency.
Roubini, like other analysts, said a major strengthening of the yuan looked unlikely.
"Even if the Chinese were to allow a gradual renminbi appreciation relative to the U.S. dollar, the size of such appreciation would be modest over the next year, not more than 3 or 4 percent as the trade surplus has shrunk, growth is likely to slow down on China and labor/employment unrest remains of concern to the Chinese."
http://www.reuters.com/article/idUSN1915926720100619
GI.
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