2014-11-04

Lang Xianping Tells Chinese Audience A Stable Yuan is Best During the Currency War; Guest Says China Needs to Run a Trade Deficit

Lang Xianping does this show each week. I didn't have time to translate any of a recent one discussing why the Chinese stock market is rallying. He goes over the SOE reforms and he says one of the most important events was the opening of the oil trade to private companies, a story sorely under covered by the Western press, but covered here: China Begins Breaking the Oil Monopoly.

This week's topic is currency war. Lang Xianping comes on at 7:40.



He starts off describing two media outlets in early October saying the currency wars could begin at any moment. Have the currency wars really begun?

Why would a currency war start? Let's look at Japan's thinking. Two years ago Japan begins Abenomics. The yen depreciates 20% against the dollar. If only the yen depreciates, Toyota's profits increase by 40 billion, Honda's by 12 billion (I assume this is RMB because it is too small in yen and too large in USD). Japanese car companies earned 1.8 trillion yen in 2013.

This year, tourism to Japan from Jan-July was up 26.4%; Chinese visitors are up 90%. GDP was down 7.1% in Q2. This is the cost you have to pay for starting a currency war.

The euro? Europe also fires a cannon at America. The euro starts depreciating in June of this year, down about 8% til now. Draghi doesn't expect the Americans to retaliate though, because the dollar hasn't weakened in 5 years. Instead, Europe and the U.S. are opposing Russia. Instead of a currency war with Europe and Japan, America is fighting an oil war against Russia. (Chart of oil prices pops up)

If oil is above $104 per barrel, Russia's finances are balanced in FY2015. If oil drops to $90 a barrel, the Russian economy will begin to wither. At $80 a barrel, Russia has a budget crisis requiring cuts. Putin said he is not afraid, they can handle things down to $70 a barrel. Lang Xianping thinks this is exaggerated, if you need $104 to be balanced, you can't continue spending at these prices.

There are two ways to drop oil prices: control the oil market and strengthen the dollar. For the first, America's little brother Saudi Arabia can first cut prices. The Saudis said it could go to $50 to $60 a barrel. America also has big reserves it can use to force prices lower.

The second way is to strengthen the dollar. This lowers the oil price and causes the ruble to devalue; it's down 18% this year. This year, Russia has already lost $55 billion due to the the devaluation, $40 came from trying to stabilize the ruble. What's scary is Russia only has $450 billion in reserves and Russia's foreign debt is $732 billion. Europe is also joining in by planning to reduce imports of Russian gas.

The Chinese yuan has only two choices: appreciate or depreciate. He takes an audience poll, appreciate beats depreciate 9 to 1. Depreciation can boost exports, but hot money will flow to America. Appreciation also has costs; really you want a stable currency. Lang Xianping then lists all of the currency deals and the growth of the Chinese yuan as an international currency. He closes by saying that if the Chinese yuan is stable (sits out the currency war), it will hurt exports, but it will help internationalize the yuan as a stable currency.

Later in the show around 25:00, Wang Fuzhong comes on and discusses how all money is debt and has no connection to gold. Second, its value is based on trust, which goes to the government. He explains the pound as global reserve currency giving way to Bretton Woods and the U.S. dollar.

He goes on to say China should have 100 year currency strategy and can follow the euro and yen to international status. Wang Fuzhong also says the financial sector development is key. Some people say the Chinese aunties will defeat Wall Street with their gold purchases, but they're buying jewelry, physical gold. Wall Street is buying and selling nothing (the futures market)! How can they beat Wall Street? The financial market is far larger than the actual markets. The whole world trades in the financial markets to find the global price.

Lang Xianping and the guest argue. Lang says manufacturing is important, but Wang Fuzhong says all that matters is you have an idea and capital. The manufacturing doesn't matter. America is the world's largest exporter because it can export paper. It prints money and can buy things, this is why becoming an international currency is so important. He says a stable renminbi is important, but mosre important is that the renminbi exchange rate is set by the market. Most important is not appreciation or depreciation of the yuan though, it is that China must run a trade deficit in order to become a paper exporter. In this way, the yuan will be an international currency.

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