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Profiting From The Rising Chinese Yuan
[The following post is written by Director of TDV Offshore, Paul Seymour]
At TDV, we aren’t fans of holding a significant amount of your assets in fiat currencies. However, as those holding the Swiss franc recently found out, as it rose 30% overnight, there is a time and place for everything.
One good option for such diversification is the Chinese yuan, also known as renminbi. Since China got into the WTO in 2001, after starting to boom economically, the US government has clamored, from time to time, for the Chinese to allow the yuan to “float” in the exchange market. Instead, and like many other governments around the world, the Chinese have opted to peg that exchange rate as a set relationship to the USD. The Saudi Riyal for example, has had the same peg for decades, but we don’t hear anyone clamoring for the Saudis to revalue the riyal.
Back in 2005, the rate was 8.3 yuan to 1 dollar. It had held steady at that rate since 1995. There was a lot of talk at that time coming from failing US manufacturers, especially within the electronics industry, of the unbeatable “China price”. The Chinese were simply manufacturing products at good quality, and at a lower price. What we might call “competition.” Maybe it was time for the people in the US to realize that they didn’t really deserve 40 bucks an hour for doing work that a robot could do better on an assembly line.
So in 2005, the US Congress, as stooges for their special interest patrons, began talking about unfair trade practices. Many taking the view that China’s “suppressed” currency was a form of government subsidy, and prohibited under WTO rules. More than a dozen pieces of legislation were then pending in Congress to try and pressure China to allow the yuan to “float” in world currency markets, letting free-market forces establish its value.
That’s a bit of a joke, really. To say that the world’s fiat currencies are traded in a “free market,” I mean. As the Chinese government has adeptly pointed out in its response to this call to control its currency by the imperialistic oligarchy—“There is no free market in currencies, as there is in wheat or bananas. Currencies trade in global markets, but their supply is controlled by a cartel of central banks, which have a monopoly on money creation. The Federal Reserve controls the global supply of dollars and thus has far more influence over the greenback's value than any other single actor.”
Steady Appreciation of the Yuan
The Chinese, though, under this growing pressure back in 2005, increased the relative value of the yuan, by reducing the peg rate from 8.3 to 8.1, which seemed to temporarily appease the world market manipulators. The yuan has since appreciated, slowly, steadily, and year after year, to the current rate of 6.2 yuan to the dollar, or 25% (an average of between 2-3% per year), since 2005.
This slow, but steady appreciation against the USD, has not appeased the market manipulators completely, however.
In 2010, the subject popped up yet again. Same old arguments followed with the call– “China, please help us deal with the predictably negative results of our fiscal mismanagement, by mismanaging your own economy” was essentially the plea. The Chinese studied the option, and decided not to create even more problems for their own beleaguered people, and by extension their hold on power.
In 2010, when Obama started calling for the Chinese to help out by damaging their own economy, the Chinese embassy in Washington released this thought-provoking response. I’ll quote some of it, but urge you to read the full text here.
It starts out with “As if the world economy wasn't fragile enough, politicians in the U.S. and China seem intent on fighting an old-fashioned currency war. The U.S. is more wrong than China here, and it's important to understand why, lest the two countries send the world back to the dark age of beggar-thy-neighbor currency protectionism.” Sounds like a free-willed bureaucrat, to me. How refreshing.
Then moves along—“A fixed exchange rate is also not some nefarious economic practice rare in human affairs. From the end of World War II through the early 1970s, most global currency rates were fixed under the Bretton-Woods monetary system created by Lord Keynes and Harry Dexter White. That system fell apart with the U.S.-inspired inflation of the 1970s, and much of the world moved to “floating rates.”
[Editor's Note: See our previous article on the Nixon Shock here.]
The Chinese Embassy continues:
“By maintaining a fixed yuan-dollar rate, China has subcontracted much of its monetary discretion to the Fed in return for the benefits of exchange-rate stability. For more than a decade, this has served the world economy well, leading to an explosion of trade, cheaper goods for Americans that have raised U.S. living standards, and new prosperity for tens of millions of Chinese.”
It finishes strongly with—“It's especially dismaying to see the same U.S. and European economists and columnists who peddled Keynesian stimulus as an economic cure-all now tell us that their policies would be working better if only the yuan-dollar price were different. Because their own ideas have flopped, they now want to make the yuan a scapegoat and risk a trade war with China. Haven't they done enough harm already?”
What’s Coming Next, and How to Play it
Therefore, full-fledged release of the yuan to the wind, like the recent CHF move by the Swiss, doesn’t seem likely. It is, though, an almost 100% certainty that the yuan will continue its steady appreciation against the USD. It could, at this point, be viewed as a safe haven currency from the demise of the USD. Thereby taking the USD one step closer to the land of no-longer-world-reserve-currency status. Good riddance.
In 2012 there was around $3.8 trillion conducted in global trade. Of that 380 billion was settled in Chinese yuan, or 10%. Since then, the pace of international deals being traded outside the USD has been picking up exponentially. For example, here in Brazil it was recently announced that all trade with Uruguay will be henceforth conducted in local currencies without passing needlessly through the USD.
Brazil, 7th in global GDP, does a lot of trade with its BRICS partner China as well. Japan, Australia, and New Zealand, all trade with China through their local currencies. Russia, just behind Brazil in GDP at #8, obviously will never do anything in the USD, ever again, and is doing huge energy deals with China.
That thanks to the war the US has declared on Russia in the past few months. Announcing economic sanctions is a declaration of war. It’s tantamount to parking battleships in the harbors. To call it anything else is just naïve. I’m watching the Russians’ new payments system with interest, as they have already set up a domestic payments system to compete with SWIFT, and potentially get us all out from under the sanctions of the USG, and its failing currency.
As the yuan is looking like a safe haven, you should strongly consider moving a portion of your USD or EURO in to it. It doesn’t have the volatility of gold, and therefore also not the upside potential. It is a fiat currency, and therefore certainly has some risk, but relative to all other fiats, the least of any out there. Almost like going into Chinese government bonds, but with more liquidity. We should note that there are some who believe the entire Chinese economy is extremely overheated, and unstable. I think that instability is true of the US economy as well, though.
Chinese bonds are also now on the radar, yielding 3.6% vs 2.3% for US treasuries. As noted recently on Bloomberg “There's going to be a big shift when that currency (yuan) opens up, when it goes into everybody's indexes, noting this week's opening of the Hong Kong-Shanghai stock connect allowing cross-trading of equities on the two exchanges is a big step to internationalizing the Chinese currency.”
Central banks are also now saying they’ll be buying Chinese government bonds, by the way. Do you think the yuan is going down anytime soon?
How To Take Advantage Of This Trade
At TDV Offshore, we can set up that brokerage account for you, allowing you to trade on the Shanghai market in yuan. Furthermore, we can get you accounts with banks in jurisdictions outside the US to protect your cash from seizure without due process, and which will also allow you access to the yuan directly, without going into equities. Both without need for a personal visit. Right now, as the USD is temporarily over-valued, is the ideal time to finally make the move you know is right for you, and your family’s future.
The brokerage account can be done for $800 if you just want a personal account. We recommend the added protection of a correctly structured/domiciled company to hold it, and that is $2,200-3,500 all-in, including the account in its name, depending on jurisdiction.
Contact me at [email protected] to get an engagement form to liberate your assets from the tyranny, and protect it from losses as the USD devalues.
Questions or comments? Join us at The TDV Blog.
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Paul worked for several years with Big 4 CPA firms in both the US and Saudi Arabia, and then spent many years as a multi-national corporate Controller and CFO in places like Florida, Riyadh, Abu Dhabi, Cairo, and Medellín. In his second, more free life, he has found a natural home in the offshore industry following almost 2 decades as a permanent expat from the former America.
The Dollar Vigilante is a free-market financial newsletter focused on covering all aspects of the ongoing financial collapse. The newsletter has news, information and analysis on investments for safety and for profit during the collapse including investments in gold, silver, energy and agriculture commodities and publicly traded stocks. As well, the newsletter covers other aspects including expatriation, both financially and physically and news and info on health, safety and other ways to survive the coming collapse of the US Dollar safely and comfortably. You can sign up to receive our FREE monthly newsletter, our Basic Newsletter ($15/month) or our Full Newsletter ($25/month) with specific stock recommendations and updates at our Subscriptions page on our website at DollarVigilante.com.
Source: http://www.dollarvigilante.com/blog/2015/2/17/profiting-from-the-rising-chinese-yuan.html#6766
