RMB -- YUAN

Tuesday 03-13-07

John J Pitera --  john@bflassociates.com

We anticipate that the Chinese will promulgate a timetable in the next few weeks which will outline the  time horizon in which the Central Bank will  reduce U S Dollar  reserves from 1.07 Trillion dollars Reserves downward to  more like 650 Billion US.  This shift in The Central Bank's Asset allocation structure will result in downward pressure on the U S Dollar.   And remember that since China has been increasing it's U S Dollar currency reserves each month, this means that they will have to be active in the foreign exchange Market selling each months trade surplus of U S Dollars in additional to about 34% of the stockpile that the Bank 0f China has accumulated.  The Central Bank and I M F have suggested that total currency reserves for China should be about 650 million dollars.  Thus the Central Bank will shift assets into different asset classes over a period of time.

This is going to be a very dynamic and exciting theme from a market analyst/trader/ Macro Asset Allocation management perspective.


Near record surplus, plans for flexible RMB

China announced a near-record US$23.8 billion trade surplus in February, hours after the central bank promised to make the renminbi more flexible, AFP reported. Authorities said the surplus was almost 10 times the figure a year earlier and nearly matched the record of $23.8 billion set in October, which is certain to spark more protests that China keeps the renminbi deliberately undervalued to gain an export advantage. February exports totaled US$82.1 billion, up 51.7% year-on-year. In response to the surplus, some US senators have suggested levying a 27.5% tariff on Chinese goods and even called for a cancellation of China's most-favored nation status, which gives it preferential policies as a developing country. Chinese officials firmly opposed the idea, suggesting it violated the rules of the World Trade Organization.

January 23, 2007 

by John J Pitera --  john@bflassociates.com

Within the next 12 months we shall see the Chinese Yuan freely trade against the other major currencies of the world.  This will create a surge in Multinational and Foreign Investment and further expand business opportunities in a whole array of industries.

This path of development can reasonably be traced back to January of 1994 when China devalued the Yuan by a third against the $USD; while simultaneously starting a "controlled floating rate band".   This was the first time the Government promised a full future convertibility of the Chinese currency.  After the 33% devaluation, the currency appreciated an incremental amount of the next year and since 1995 it was held at a constant 8.3 Yuan to the US Dollar.

A Decade of Value of the Yuan

Let's Look at the Growth of the Chinese Economy during the first decade of a managed floating rate system.

  China 's National Bureau of Statistics, U.S. Census Bureau, International Monetary Fund (IMF)

	1994	2004
China GDP	$542.5 billion	$1.601 trillion
GDP Growth	11.8%	9.5%
Total Exports	$120 billion	$593.4 billion
Total Imports	$115 billion	$561.4 billion
Total Trade Surplus	$5.3 billion	$32 billion
Trade Surplus with U.S.	$29.5 billion	$161.9 billion
CPI	24.1%	3.9%
Indust. Prod. Growth	18%	17.1%

As we can see the vigorous Chinese economy experienced a 3 fold increase in GDP.   The Gross Domestic Product growth rate has been humming along consistently at an annual growth rate of about 10%; and numerous economists and market analysts have stated that the official GDP growth numbers are understated and actually GDP growth is between 13 and 16 percent a year.    Former Quantum Hedge Fund co-manager  Jim Rodgers, (who managed the fund with Billionaire investor and Philanthropist George Soros) has stated in his latest book that the Growth rate has been in the mid to high teens.

Total Exports witnessed a 500 percent increase during the decade while the total trade surplus went up over 600 percent.

China's trade surplus more than tripled in 2005 from the previous year to breach the $100 billion mark for the very first time , a spurt that's likely to intensify protectionist sentiment in the U.S. against one of its biggest trading partners.

The General Administration of Customs reported on its Web site on January 12th that China's trade surplus hit $101.9 billion last year, with exports rising 28% from 2004 to $762 billion and imports up 18% to $660 billion. The trade surplus for 2004 was $32 billion.

Beijing's swelling trade surplus is likely to become an increasing irritant in its relations with the U.S., which is expected to report a trade deficit with China of more than $200 billion for 2005, up from $162 billion in 2004.

At the end of December China in another step toward more currency flexibility, China's foreign-exchange regulator approved 13 foreign and local banks to act as yuan market makers.

Market makers are obliged to quote bid and offer rates, which enhances liquidity in the market and help make foreign-exchange trading more active.

ABN Amro Holding NV, Bank of Montreal, Standard Chartered PLC, Citigroup Inc, and HSBC Holdings PLC are the foreign banks, while domestically Bank of China, China Construction Bank, Industrial & Commercial Bank of China, Agriculture Bank of China, Bank of Communications Co., China Merchants Bank Co., Citic Bank Co. and Industrial Bank Co. were approved as market makers  The charter member banks  will make markets in the Yuan against the U.S. dollar, euro, Hong Kong dollar and Japanese yen.

Since early January of this year , China publishes benchmark rates for the yuan against the U.S. dollar, euro, yen, and Hong Kong dollar. 

The new trading system is another step in giving market forces a larger role in determining the value of the Yuan, and making the market for the currency more flexible. The new system will provide price feedback in the foreign-exchange market and encourage financial firms to better manage risks, the central bank said.

On Friday January 20th The Yuan  made its biggest daily gain against the dollar since being revalued and closed at its strongest level so far, signaling increased volatility in China's foreign-exchange market.

Rising short-term interest rates in China encouraged traders to sell dollars for Yuan, and the central bank didn't stand in the way of the fall, some traders said.  Others said large daily moves will become more commonplace as banks trade the currency more actively and carry out more proprietary trading. Such volatility "should have happened earlier, but it's just happening now," said one trader.

The dollar closed at 8.0601 Yuan on the country's automatic price-matching system, down from Thursday's close of 8.0673 Yuan. 

The Chinese Yuan Journey towards a Market Based Currency.

Jan. 1, 1994 : China devalues Yuan by 33% against U.S. dollar and begins using a "controlled floating rate system." Special currency for foreigners and international trade, called Foreign Exchange Certificates, are removed from circulation. China pledges goal of eventual full currency convertibility.

January 1995: U.S. Treasury says China is no longer a currency manipulator, reversing a years-long stand. 

July 2, 1997 : Thailand devalues the baht, sending regional currencies into free-fall, sparking the Asian financial crisis.

September: U.S. Treasury Secretary Robert Rubin suggests Yuan undervalued, saying, "it'd make more sense" for China to buy U.S. goods rather than accumulate foreign-exchange reserves, then at $130 billion.

January 1998: Premier Zhu Rongji (left) pledges Yuan will remain stable on eve of meeting U.S. Deputy Secretary of Treasury Lawrence Summers. U.S. official travels to region to shore up confidence in currencies, including Yuan.

May: Strongman Indonesian President Suharto resigns after mounting public protests, ultimately stemming from country's currency crisis.

June: U.S. Treasury Secretary Robert Rubin praises China as one of world's "sources of stability" for resisting pressure to devalue.

Dec. 11, 2001 : China enters World Trade Organization. Terms include no references to exchange-rate system.

2002: U.S. records bilateral annual trade deficit exceeding $100 billion with China for first time.

January 2003: Inflation data mark end of five-year bout with falling prices in China , including outright deflation in 2002.

May: China balance of payments data for 2002 first time ever show "hot money" inflows rather than capital flight.

July: U.S. Federal Reserve Board Chairman Alan Greenspan (right) implies Chinese exchange rate should be adjusted up, saying fixed rate will breed inflation and is "something they'll have to address."

September: U.S. convinces G-7 Finance Ministers to issue statement calling for "more flexibility in exchange rates ... based on market mechanisms," a barb directed at China . U.S. Treasury begins "intensive engagement" with China to push for yuan flexibility.

October: Congressional appointed U.S. -China Economic and Security Review Commission says yuan 15% to 40% undervalued.

October: People's Bank of China raises official interest rates for first time in nine years to stem fast-gaining inflation.

March 2005: Premier Wen Jiabao (left) says objective of yuan reform is to create "market-based, managed and floating-exchange rate." Adds, yuan reform could "come around unexpectedly." National People's Congress endorses Mr. Wen's call for crackdown on excessive investment and switch to "appropriately tight fiscal policy."

April 29: China yuan trades outside of usual exchange rate band for nearly 20 minutes.

May: U.S. Treasury Secretary John Snow warns China could be relabeled currency manipulator if no flexibility emerges before November.

May: System launched in Shanghai allows Chinese banks to trade in world currencies at international exchange rates, although yuan not included.

June: U.S. Senators Lindsey Graham and Charles Schumer shelve effort to slap 27.5% tariff on imported Chinese goods, citing reassurance from Messrs. Greenspan and Snow China will soon adjust exchange rate.