Lang Xianping Explains Renminbi Devaluation to Studio Audience

From April 14, 2014.

At the beginning the host cracks some jokes about what is money? For women it includes credit cards...

2:00 He asks what is the world's most stable currency? Some people shout out U.S. dollars, he says it is definitely not U.S. dollars. It is in fact Yap Island, where they use stones for money. The largest is 8 tons. That is stable money. On Yap island, you don't need to buy fixed assets, your money is a fixed asset. It's also very hard for their corrupt politicians to move their money overseas. He goes on to crack some more currency jokes on hyperinflation and a case in Zaire where the money from before 1997 could still be used, but the former dictator Mobutu's head needed to be cut off. [I tried looking that up but didn't find anything. Although searching for head cut off came up with lots of examples.......]

5:00 The most moving (as in emotionally) currency is renminbi. It valuable. The best thing is to earn renminbi in China and spend it in America. This is because Americans are very poor, so you can buy things cheaply there. [He is referencing the fact that America has a lower cost of living.] He says his girlfriend told him to stop playing the forex market. A brand name handbag in China is 10,000 yuan, in America it is 7,000 yuan, every time we buy one, we make 3,000 yuan.

6:00 Enter Lang Xianping.

7:00 At 2013 Year End the world's 8 biggest banks all forecast a rising yuan. Including Barclays, Nomura, Credit Suisse, HSBC, Morgan Stanley, Goldman Sachs and UBS. They forecast it would rise to 6 to 1 U.S. dollar. In Q1, the yuan depreciated 2.64%.

He says he doesn't look at the yuan, he looks at the results of the games that China, the U.S. and E.U. play. A new "Three Kingdoms." The U.S. is the economic leader. Europe and China are under U.S. pressure fighting for survival.

8:50 He shows the exchange rate with a red line showing the banks' forecast. The bounce in Q1 reversed the gains from 2013. Why? He says this is the inevitable result of the struggle between the "Three Kingdoms."

9:50 The new "Three Kingdoms" map.

In 2005, renminbi began appreciating. America wanted renminbi to go from 8.27 to 4.10. A rise of 100%. At the end of 2013, renminbi was 6.1, appreciation of 36%, far from 100%. Why didn't American continue to pressure China? It's because China's prices have risen as well. Renminbi has no more room to go up. He uses the Big Mac Index to illustrate. In 2005, a Big Mac was $1.27 in China. Today it is $2.74. Doesn't this mean the dollar depreciated? It depreciated 115%? Or renminbi doubled? So by the Big Mac Index, America's goal has been accomplished.

11:40 After this pressure what happens? Point two is most important. “Three Kingdoms” games officially start. The American economy is the first to pick up. In 2013, U.S. GDP growth in Q1-Q4 is 1.3%, 1.6%, 2%, 2.6%。 Accelerating growth. Unemployment falls to post-crisis low of 6.7%. Investment increased 2.3% in 2013, and this year forecasts are for growth of between 4.9% and 7.3%. Finally, America's stock market explodes higher. Last year the S&P 500 gained 31.8%.

If you see these indicators, what will you do? Sell your currency for dollars and invest in U.S. stocks. This causes the currency to depreciate. South Africa, Turkey, Brazil, Russia, their currencies devalued greatly. The whole world depreciated. So renminbi falls 2.64%, you think it is strange? Euro depreciates, you think it strange? It's not strange because the U.S. economy is rebounding it will lead the dollar to rebound.

14:00 Now today we most want to pay attention to the Europe and China. In 2012, Europe GDP growth is -0.6%. Last year, -0.4%. In February of this year, the unemployment rate is still at historic highs, 11.9%. What will Europe do? Print money. Europe's inflation rate is only 0.5%, their target is 2%. So they have plenty of room to print. This causes the euro to depreciate.

China? It's economy also has great problems. This year, 11 provinces including Sichuan and Henan will invest 1.6 billion yuan. In a few years, 15 provinces will invest 18 billion yuan. Invest in energy, transportation, water, environmental protection, etc. Why invest? To stimulate growth. Now if these 15 provinces will in future invest 18 billion yuan, where will this money come from? Printing money! So both China and Europe are printing money. But China is in worse shape because we have 4 big credit problems.

1. Private companies can't access capital (broke their capital chains)
2. Real estate, coal and mining company trust crisis
3. Local government might have a debt crisis

All these three borrow whose money? Banks.

4. So the 4th crisis is a banking crisis. If the 4 big banks default, what will the government do? Print money! Of course renminbi will depreciate.

16:50 Then how will we invest? U.S. dollars? Gold? Euros? First gold. The most recent 11 investment bank forecasts for gold in 2014. The lowest is $1050, the highest is $1300. Average of $1204 per ounce. This is their forecast, not mine.

17:50 Now dollars. The forecast is for it to continue rising. The dollar moves inversely to gold. If the dollar rises, there's a 70% chance that gold will fall. This is the current status quo.

18:30 Euros. Average forecast is for the euro to fall to $1.295 versus the dollar. It will depreciate 5.8%. This is the investment banks' forecast.

19:00 Renminbi. The forecasters all got it wrong. Turns out no one dared make another forecast. Why don't they dare forecast? Because the more they see, the more they do not understand. If you only look at renminbi, it should rise. Then why did it suddenly drop?

19:30 This is what I say. Only from a global macroeconomic perspective can you fully understand the yuan's current situation. I don't want to give too many people's opinion. So in the end, I put a big red question mark, because all the big banks say they cannot forecast the yuan exchange rate.

20:00 Question time. First one is about yen depreciating 30% in 2013 and the stock market rising. If renminbi depreciates, how do we protect our assets?

Lang Xianping answers: China's situation is very complex. Of course, exports will be helped. But the profits of publicly listed companies cannot be solved by depreciation. And the small depreciation of 2.64% has little effect, doesn't help the economy's problems. As for stocks, there are also economic reforms that need to be successful. So these are not easily solved by the exchange rate.

Next question is about how the central bank controls the exchange rate.

Lang Xianping: For the past 8 years, renminbi went up, the best investment strategy was to buy renminbi, stick it in real estate, WMPs or trusts and then exchange it back to dollars. But the situation has changed.

Next question is about depreciation helping exporters and the economy to grow at 7.5%.

Lang Xianping: Cannot rely on consumers, consumption is depressed. Investment is paid for with money printing. Then there's exports, which is helped by depreciation.

A final question on profiting from depreciation doesn't help the economy.

In the discussion afterward, the host brings up that for 9 years, everyone expected appreciation and planned for it; when renminbi falls, no one is prepared. Also how the yen fell 30% and America didn't do much, but renminbi falls 2.64% and America is very concerned.

Is the exchange rate a political or economic problem? Lang Xianping says every exchange rate it a political question, not only an economic one.

An audience member says if renminbi depreciates, her child can go to graduate school in America. If it appreciates, her child can go to undergrad in America too.

Lang Xianping around 42:00 compares the yuan's small drop to the big drops in other emerging market currencies and says if that happens, there will be huge problems. He doesn't want to think about it.

At the end the host mentions there are now Taiwan aunties buying renminbi. (a reference to China's gold buying aunties)

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