2011-11-10

Yuan can go down

Yuan Bet Losing Its Luster
"People are backing out of the yuan trade because it's become a riskier bet since the scramble for U.S. dollars intensified in late September," said Tim Condon, Singapore-based chief Asia economist with ING Groep.
The Chinese yuan increases as the Chinese diversify their reserves away from the U.S. dollar. What happens if the U.S. dollar begins a new bull market? What if global financial crisis leads to the most epic dollar rally in history? People think China selling U.S. dollars means the yuan goes up because they believe the U.S. dollar is guaranteed to go down. They believe the Chinese economy will keep growing at 9%. Imagine both these ideas are shattered and China starts looking mortal, or worse, like every other emerging market that goes through a major financial or economic crisis.The other assets in China's reserves will decline relative to the dollar, weakening the yuan's value versus the greenback, but since the dollar still accounts for much of the yuan's value, Chinese exporters will be wiped out by a major rally and the housing market will implode in the face of such deflation. What happens when there's a run on the PBOC as Chinese madly swap yuan for USD? The minute they close the window because they cannot defend the peg, the yuan's value plummets.

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