The unique path of China’s development has affected its monetary policies and regulation. Transformations in the country started in early 1980s and resulted in rapid growth of the PRC’s economy and, of course, increased weight in the international area not only on different markets, but also in the financial sphere. By late 1990s China eventually became the second-largest holder of gold and foreign currency reserves and the largest holder of debt securities of the superpower – the US. Today China is among leaders of the global economic system and its monetary policies greatly affect global financial markets.
What makes PRC’s monetary policies different from western ways?
According to experts of the Masterforex-V Trading Academy:
• PRC’s monetary policies are characterized by high effectiveness and specifics far from what is acceptable in liberal economies;
• this helps the country’s government to counter foreign influences and continue successfully developing Chinese economy even in the context of the global crisis;
• monetary regulation in China constantly changes in response to requirements of the current situation and undergoes an evolution which is far from meeting generally accepted standards.
• another stage of this evolution involves increasingly higher demand for the Chinese monetary unit in currency markets;
• financial transactions involving the Yuan made outside PRC started in July 2010;
• their volumes are very little yet as compared to the overall turnover of financial markets, but demand for the Yuan appeared substantially higher than expected and constantly grows;
• in December 2010 the volume of Yuan transactions reached 400 mln. dollars. This figure may seem more than modest compared to 4 trillion dollars of daily turnover on financial trading floors. However, it should be remembered that demand for the Yuan is increasing exponentially;
• Chinese government already allowed over 67,000 companies to make transactions involving the Yuan whereas in early July there were only 365. There is a growing amount of funds held by these companies on accounts in Hong Kong banks – they reached 45 bn. dollars or 300 bn. Yuans in absolute terms;
• according to specialists of Standard Chartered, the number of import transactions involving the Yuan will reach 20-30% in the years to come after the today’s one percent. Steps taken by the Chinese government to strengthen convertibility of the Yuan drive growth of this currency against the US dollar.
Forecast: will the Yuan become a hard currency?
Classics of liberal economy treat the idea of free convertibility of a national currency as indicative of its significance in the global financial system. However, the currency wars that recently broke out showed that lack of convertibility of their currency is rather an advantage for national economies:
• inability of western countries' leaders to deal with crisis phenomena in their countries pushed them to look for ways of depreciating their own currencies and, thus, increasing export potential of their economies.
• at this stage main events of currency wars occur on the front line of the euro and the dollar. However, it is China that the American financial community regards as its main rival;
• US Fed's Chairman, Mr. Ben Bernanke recently claimed that the course taken by the PRC in terms of the Yuan has exceptionally negative effects both for the US economy and the entire global economic system;
• in addition, according to the Fed Chairman, a weak Yuan might threaten uncontrolled inflationary processes in China itself, while a hold on the Yuan’s strengthening ensured by lack of its convertibility can be described as the PRC's government having no monetary and credit policy of its own;
• advantages available to Chinese exporters through the regulated exchange rate of the Chinese currency, as the US government believes, result in trade misbalances between the countries and it is China that is called the culprit in the huge trade deficit closing their own eyes to the obvious fact that roots of all these economic problems the US is facing lie in Washington itself.
The Yuan hasn’t become a hard currency yet and is trading in a narrow H8 range (6.6195-6.6700) which formed as a correction to the Monthly bearish wave (6.8357-6.6195) which started as early as in 2009. Experts of the Faculty for Learning of the Masterforex-V Trading System believe that an H4 level bearish wave has formed within this range and is having a wave – the MF Moment of Truth – form against it as an indication of further direction of the medium-term trend: a break of the upper boundary of the range will trigger an H8 Fractal-Zigzag Reversal with 6.7021 as the next important resistance; or a break of the boundary of the narrow range at 6.6400 with a resulting H4 FZR and the next important resistance level at 6.6195, the historical low.
What are such statements primarily connected with?
• such statements are connected with the fact that the US cannot find a way to influence the Chinese economy because there is too little Chinese national currency in the open market which makes it impossible to buy large enough amounts of it to enable exercising any pressure on Beijing’s economic course;
• besides, as a result of a stronger Yuan China's largest debtor, the US, would effortlessly decrease its debt to this country by shifting the burden of a substantial part of its own problems related to Washington’s ineffective economic policies on the Chinese economy.
• it should also be remembered that Washington’s financial dependence on Beijing makes it also a political hostage of China;
• a number of analysts explain PRC’s monetary policies by that the Chinese government can let go of the Yuan’s exchange rate only after the PRC becomes the world’s largest global state in terms of development and can successfully replace the US dollar as the global reserve currency. • this scenario isn’t acknowledged yet by official Chinese sources but steps in this direction were made by the Chinese government as early as in the 1990s;
• the first stage in implementation of such plans adopted by General Secretary Jiang Zemin involved trading transactions made since 2000 with neighboring countries with settlements done in the Yuan;
• later, in early 2008, China started performing currency swap transactions with a number of countries in South-Eastern Asia and the Republic of Belarus. Today tax benefits are offered to companies that use the Chinese currency in settlements with foreign partners;
• one of the stages will involve use of the Yuan as a savings instrument for people and financial institutions outside the PRC while the last, final stage is expected to make the Yuan the global reserve currency which will be bought by largest financial institutions and central banks.
The Chinese Yuan cannot be expected to become fully convertible until the PRC’s economy becomes dominant in the world, and the issue of Washington’s debt to Beijing is solved between China and the US.
According to Chairman of the Central Bank of Hong Kong, Norman Chan, a freely convertible Yuan will open the way for new relationships in the global financial system. Thus, the world is at the doorstep of a new epoch – the epoch of the Chinese Yuan.
Experts of the Masterforex-V Trading Academy and the Editor’s Office of Market Leader hold a survey: in your opinion, will the Yuan manage to replace the US dollar?
• yes, the Yuan will soon replace the dollar;
• no, the Yuan won’t be a global currency, this is ruled out.
Source: Market Leader
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