HANGZHOU – Two brothers and their father were sentenced to death on Monday for cheating 15,000 investors out of over $1.1 billion in east China’s Zhejiang province. Ji Wenhua, president of the Yintai Real Estate and Investment Group, was sentenced to death for the crime
Dan Collins CMR “Gold going to $7,000”, an article today in the Chinese media is going viral and one of the most viewed articles in the financial press. The article references American Jim Rickards and his concept of comparing inflation-adjusted gold prices. Most Chinese economists
It’s not uncommon for the large Wall Street banks to combine in shorting an entire years supply of minded silver in a single day.The same goes for all commodities. Endless paper printing getting funneled to Wall Street has destroyed all real price discovery. Capitalism fails
Chanos is back! His short China thesis is very long in the tooth but as it goes with most ego maniacs he cannot accept failure or that fact that he might be wrong. Being wrong on an entire country where you have never visited and
Dan Collins CMR When I moved to China back in 1998 I was surprised to learn how highly the Chinese thought of America. Of course China was a much poorer place back then but coming from the Detroit area I couldn’t fathom where was all
You have to laugh at the whole “China will collapse crowd” on CNBC and even respected sites like Zero Hedge. Personally, I love the Zerohedge stuff. They understand the ponzi-financial fraud-money printing-welfare state economy that now envelops the West. But China is a real economy,
D.Collins CMR China’s cloud computing market is expected to be worth 37.2 billion yuan (US$6 billion) in 2017 as demand for the service grows, the Chinese-language China Securities Journal reported on Friday. Some American tech companies are watching the largest and fastest I.T. market in
Breaking News today that a Chinese vessel as rammed and sunk a Vietnamese fishing boat. All countries in the South China Sea and East China Sea are using fishing boats in a game of cat-and-mouse to challenge each other on their respective areas. This time
Stockswatch China has become a banking powerhouse. Four of the five largest banks in the world are Chinese, according to SNL Financial’s latest global bank rankings. It’s a big change from the past few years when only two Chinese banks made the top five. Beijing-based
Scared of losing the Chinese tourist dollar, France has relented to China and will allow Chinese police on the streets of Paris. More signs of the benefits of third-world immigration into the West to the point where cultural breakdown has occurred and law and order
Gold has been flowing East for a decade. When the West wakes up to the fact that their gold is gone, they will no longer have sound money with which to back a currency. The world has only been off a gold standard since 1971
From the China Daily… BEIJING – China will lower banks’ reserve requirement ratio (RRR) by 0.5 percentage points starting May 18, the country’s central bank announced Saturday. The cut, the second of its kind this year, will drop the RRR for the country’s large financial
Is China tweaking its numbers on GDP? Probably. For twenty years Chinese GDP roughy came in right on the governments target. This would be an almost magical performance record considering economists in the West can predict absolutely nothing. For years, China most likely lowered GDP
Japan will learn the hard way that destroying your currency is not an viable economic strategy. Shanghai Daily JAPAN posted a record 1.63 trillion yen (US$17.4 billion) trade deficit in January as rising exports trailed surging imports of crude oil and gas due to rising
American GDP: The Fantastic Fiction of American Economic Strength By Dan Collins Is the U.S. economy still the most powerful in the world? That is what we are told as the United States does have by far the world’s largest Gross Domestic Product (GDP). In
Chinese Sprinter Su Bingtian just ran himself into the multimillionaire
club in China by being the first Asian to run under 10 seconds in the
100m finishing 4th in the finals in Beijing. Sponsors will now be
beating down the door. Its not at the same level as Liu Xiangs Gold
metal in the 100m hurdles in 2008 but its not far behind and he has
years left to improve.
Want China Times
China’s central bank has dumped more than US$100 billion in US-dollar reserve holdings over the past two weeks to stabilize the value of the renminbi and could liquidate a lot more over the next four to five months, according to a report from US-based financial blog Zero Hedge.
On Aug. 11, the People’s Bank of China devalued the renminbi and in the ensuing three days the value of the currency dropped 4% against the dollar. Shortly after this, however, the renminbi stabilized because the bank began intervening directly in the foreign exchange market by purging foreign reserves of US dollars at a rapid pace.
As noted in analysis by French multinational banking services firm Societe Generale, the People’s Bank slashed its reserve requirement ratio (RRR) for all banks by 50 basis points on Monday and offered additional reductions of 300 bp for leasing companies and 50 bp for rural banks. When these measures take effect on Sept. 6, the total amount of liquidity injected will be close to 700 billion yuan (US$106 billion).
Analysts were already stunned to discover that China had sold some US$107 billion in US paper in the first half of the year, and now China has sold nearly just as much over the last two weeks alone, the Zero Hedge report said.
China’s actions will place a significant amount of pressure on the plans of the US Treasury to raise interest rates, given that the more the renminbi devalues against the US dollar as a result of rate hikes the more likely the People’s Bank will increase the scale of its foreign reserve dump to stabilize the renminbi.
According to Societe Generale, as China’s foreign reserves are still at 134% the recommended level, the People’s Bank still has around US$900 billion it can dump for currency intervention before it affects the country’s external position.
If the current pace of liquidity outflows continue and require US$100 billion in reserves to be dumped every two weeks to stabilize the renminbi, then based on its estimated reserves China would be able to continue interfering in the foreign exchange market for another 18 weeks, Zero Hedge said, adding that it remains to be seen whether the US Federal Reserve will do anything to stop the biggest offshore holder of US Treasurys from liquidating its entire inventory
Concerns over a possible U.S. rate rise by the Federal Reserve may have sparked a global stock market rout rather than the devaluation of China’s yuan currency, a senior Chinese central bank official told Reuters on Thursday.
Yao Yudong, head of the bank’s Research Institute of Finance and Banking, said the U.S. central bank should delay any rate hike to give fragile emerging market economies time to prepare.
He said Beijing’s decision to let the yuan fall in value against the dollar should not make it a scapegoat for the sell-off.
“China’s exchange rate reform had nothing to do with the global stock market volatility, it was mainly due to the upcoming U.S. Federal Reserve monetary policy move,” Yao said.
“We were wronged.”
BEIJING (Reuters) – China is showing “rare courage” to reform in the face of economic troubles, the country’s top newspaper said, deriding foreign media for fanning fears that recent stock market turmoil could herald the end of China’s model of economic governance.
Plunging stock markets have exacerbated worries about China’s faltering economy, with share prices dropping 25 percent in little more than a week before the central bank cut interest rates and further loosened bank lending on Tuesday.
The ruling Communist Party’s official People’s Daily slammed foreign doomsayers for suggesting the country’s economic system would be shaken to its core in a commentary published on Thursday under the pen name “Zhong Sheng”, meaning “Voice of China”. “Some people around the world have rather impatiently spoken of the so-called end of the China model, or of a hidden financial crisis in China,” The People’s Daily said. “Of course, Chinese people are already unsurprised by the selective thinking in Western public opinion,” the paper said, noting that commentators on the U.S. economy were far less alarmist when the dot-com bubble burst in the early 2000s.
“China is devoting rarely seen courage to comprehensively deepen reform. The world also needs to reform its perspectives on China,” the paper said. The central bank’s latest moves have yet to convince investors of Beijing’s ability to jolt the economy out of its slowdown, with some economists estimating the current level of growth may be half of the government’s 7 percent target.
Chinese state media English-language commentaries, which typically target foreign audiences, also lashed out at Western alarmism over China’s economy.
The Global Times, a popular and influential tabloid published by the People’s Daily, said in an editorial that any notion that the slowdown would impair the party’s legitimacy was a “delusion”.
“The stock market’s sharp fall is like a fever, but foreign media describes it as a cancer. If so, the market plunge seven years ago would have ended the China model,” it said.
The official Xinhua news agency in its own English-language commentary on Wednesday said that “market jitters will not last long” and China optimists need more time to prove they are right.
“Only those investors who have grasped an objective picture of the Chinese economy can weather the turmoil and reap their gains,” Xinhua said.
But a commentary circulated widely last week in state media, including by China Central Television and the Guangming Daily, a party paper aimed at intellectuals, pointed to domestic resistance over the government’s handling of the economy and broader reforms.
People must be more conscious that President Xi Jinping’s push to reform will inevitably touch upon deep issues in China’s politics, economy, society, military and diplomacy, and deals with the basic question of making “the lifeblood of this enormous economy” healthier, the commentary said.
“The enormity of the difficulty” and the fierceness and complexity of opposition to reform, “possibly exceeds people’s imagination,” it said.
(Reporting by Michael Martina and Ben Blanchard; Editing by Simon Cameron-Moore)
The benchmark Shanghai Composite Index sank 7.6 percent to close at 2,964.97, falling below the 3,000 level for the first time in eight months. The gauge has lost 22 percent over the past four days.
More than 1,000 stocks slid by the daily limit of 10 percent on Tuesday, including China National Petroleum Corp and Sinopec Group, the country’s State-owned oil giants and heavily-weighted blue-chips of the Shanghai gauge.
Banks including CITIC Bank, Bank of Communications, Everbright Bank, Ningbo Bank and Nanjing Bank dived by more than 9.5 percent.
The ChiNext Index, tracking China’s NASDAQ-style board of growth enterprises, plummeted 7.5 percent to 1,990.71 on Tuesday.
Turnover continued a downward trend, with 358.7 billion yuan of stocks changing hands at the Shanghai exchange. The extending balance of margin trading dropped for a fifth day by 6 percent as of Monday, latest data by the bourse showed.
The Chinese government failed to step in and protect the 3,500 benchmark
on the Shanghai composite on Monday. The markets remain way to volatile but
in retrospect are still up considerably over the last couple of years and only
just went negative for the year. The smart money in China evacuated as the
the index was pumped up to incredible levels by the mom and pop investors.
The little guys late to the rally have now had their faces ripped off.
We could go lower even testing 2,000-2,500 levels which is where the rally
started back in the middle of 2014.
However, instead of seeing the end of the popping of a stock bubble, the West
has extrapolated it as an economic crash. Once again, they confuse markets with
real economies. Is the Chinese economy booming? No, not at all. But is it
collapsing.. once again, not at all.
The Chinese economy is a two speed highway, the high tech firms and modern
private companies are booming and the state owned sector stuck in old industries
and plagued by overcapacity and in for consolidation. It’s a much needed creative
destruction of governments vanity projects and malinvetsment, in this case
infrastructure and steel making capacity.
As bad as the economy may or may get in Asia, at least they are not living
Want China Times
The People’s Liberation Army has sent troops to China’s border with North Korea as escalating tensions on the Korean peninsula have pushed North and South to the brink of possible war.
The Hong Kong-based Oriental Daily reported Saturday that internet users have been uploading photos of what appear to be PLA armored vehicles and tanks passing through the streets of Yanji, the seat of the Yanbian Korean autonomous prefecture in eastern Jilin province. The city, considered a key transport and trade hub between China and the DPRK, is less than 30 kilometers from the 1,400-kilometer border.
The military deployment is believed to reflect how seriously Beijing considers the the current standoff between North and South Korea. Delegates from Pyongyang and Seoul have agreed to continue talks at 3 pm Sunday local time after the first high-level dialogue between the two sides in nearly a year was adjourned following a marathon 10-hour session.
The talks began around 6:30 pm on Saturday shortly after the passing of Pyongyang’s deadline for Seoul to cease broadcasting anti-DPRK propaganda across the demilitarized zone through loudspeakers. Pyongyang had declared that its frontline troops were prepared to go to war if Seoul did not back down and an unnamed official from South Korea’s defense ministry has reportedly said that his government will only discontinue the broadcasts if there is an acceptable outcome from the talks.
The loudspeaker broadcasts began from the South after a land mine attack — for which the South has blamed the North — injured two ROK soldiers. On Thursday, the South Korean military fired dozens of artillery rounds across the border in response to North Korean artillery strikes, in turn supposedly in response to the South’s broadcasts. As usual, Pyongyang has denied being behind both the land mine attack and the artillery strikes while keeping up its standard “sea of fire” rhetoric.
The standoff also comes amid annual military exercises between the US and South Korea, which the North claims is part of a preparation for invasion.
On Aug. 21, Chinese foreign ministry spokesperson Hua Chunying said that China is following “the situation of the Korean peninsula very closely and is deeply concerned about what has happened recently.”
“China staunchly safeguards regional peace and stability and opposes any action that may escalate tension. We urge relevant parties to remain calm and restrained, properly deal with the current situation through contact and dialogue, and stop doing anything that may make the tension even worse,” Hua said, adding that the Chinese side is “willing to work with relevant parties to jointly ensure peace and stability of the Korean peninsula.”
China’s Global Times tabloid has tried to downplay the risk of military conflict, stating in an editorial: “The South and North are not willing to start a full-scale war, and no one is instigating a war. As a result, the new round of friction may not be explosive and can be dissolved by previous experiences. After all, escalation will do no good to either side.”
The Korean Central News Agency, North Korea’s state news agency, has hit back at China’s calls for restraint, saying, “We have exercised our self-restraint for decades. Now no one’s talk about self-restraint is helpful to putting the situation under control.”
China is about to take over a military base from the United States in the small East African nation of Djibouti, according to the website of China’s nationalistic tabloid the Global Times.
Djibouti reportedly ordered the US to vacate the Obock military base so that it can be turned over the People’s Liberation Army. According to US-based magazine CounterPunch, the announcement was made in May, a day after US secretary of state John Kerry visited the country.
The move is said to be “deeply worrying” for Washington as it comes amid a wave of Chinese investment in Djibouti that includes a US$3 billion rail project to connect the country with the capital of neighboring Ethiopi, Addis Ababa, and US$400 million in investments to modernize the country’s undersized port.
The deals have had Djibouti’s president Ismail Omar Guelleh “openly talking about the importance of his new friends from Asia,” the CounterPunch article said.
Djibouti is currently home to Camp Lemmonnier, the largest permanent US military installation in Africa, which houses 4,000 troops and a fleet of drones. The US Defense Department pays Djibouti nearly US$63 million per year for use of the base.
Though the US is losing only a secondary military installation in Obock, Washington is likely more concerned with what the base will provide China, which is strategic positioning in the Horn of Africa at a key entry point from the Indian Ocean to the Red Sea and a gateway to the Suez Canal.
South Korea detected a projectile, assumed to be a small rocket, that was
fired toward the western province of Gyeonggi. The South Korean military
responded by firing a few dozen shells at the area from which the North
Korean projectile was fired, the official said.
The North then came out with this announcement broadcast below
(Very very Loosely translated…)
Like a moth to the flame of nuclear justice, the Southern puppets
of Western imperialism dared try to scare us again! Once again…we
have overcome the enemy with sophisticated technology…something we
call “The worldwide web”. It is a classified North Korean
invention that connects computers and was invented by the Dear Leader Kim Jeong
Un. The starving Americans continue to try an assault us in tandem
with the Japanese devils. Through our superior technology of “World wide web”
and “Netscape Browser” , we are monitoring all their communications.
Long Live the North! Long Live the Dear Leader…the rest of you, now back to
collecting mushrooms to find something to eat.
The Chinese Yuan has now become the Sun with all Asian currencies
orbiting around it. This means further devaluation of the RMB is
fruitless as the PBOC will likely conclude. As we live out the
last days of U.S. Dollar hegemony, these days will go into the history
books and something that “no one saw coming.”
HANOI, Vietnam (AP) — Vietnam allowed its currency to weaken by at least
1 percent Wednesday following the devaluation of the Chinese yuan and
the expectation of a possible U.S interest rate hike.
The central bank-set reference rate weakened to 21,890 dong to the U.S.
dollar and the trading band within which the dong can be traded was
widened to 3 percent from 2 percent, the State Bank of Vietnam said.
Former CEO at An Zhong (AZ) Investment Management Shanghai
Four More Exogenous Events for China
When the PBOC announced a change in methodology for calculating the midpoint reference rate and the currency immediately depreciated 1.9% the press responded as if Buster Douglas defeated Mike Tyson. Long time China investors fully understand that 10 years down the road may actually be easier to forecast than 10 weeks and with that in mind, I offer 4 events that might, but shouldn’t, surprise any China watcher:
The removal of daily and annual limits on RMB conversion
Hong Kong scrapped limits on so-called CNH (RMB in HK) conversion last year and despite the fear/reality of hot money flowing out of the mainland, SAFE must comply with the PBOC’s desire for an international currency. Getting in and out of the currency is the single largest barrier to IMF consideration. Outside of China the RMB is effectively fully convertible but there remains daily and annual conversion limits for locals and foreigners.
Eliminate Foreign Investment Programs
In conjunction with daily and annual limits on RMB conversion, there must be bigger pipes and operational efficiency to investing in the equity and fixed income markets in China. The total QFII+RQFII+Stock Connect is only about $180 billion USD equivalent which represents less than 1.8% of the China equity market. As a comparison, foreign ownership of Japanese stocks is 30%. Of course some of this disconnect is demand related, but China will move to eliminate the barriers to investment. Recall that China also has the third largest fixed income market and there is still very little pure access. Without easy access and increased transparency, the international community will continue to stay on the sidelines.
RRR Rate Cuts
A good primer on how the PBOC uses the RRR is helpful in understanding why further rate cuts are on the way. Simply stated, capital outflow will continue and when that happens, the PBOC sells reserves and cuts the RRR to offset. Of course there are other tools, such as open market operations, but China has traditionally eschewed a target for interbank rates and chooses to moderate deposits and the RRR.
Swap Treasuries for Gold
Over the last 5 quarters, China has sold more than $520 billion of foreign exchange and forecast to sell more than $40 billion a month. This is partially to combat the $800 billion in capital flight from the country over a similar period, but also for a more strategic reason. China still owns 3.5 trillion, but curiously, China’s been running a large and soon to be larger trade deficit (given the currency depreciation) which would usually equate to an increase in foreign exchange (first half of 2015 $260 billion versus $100 billion last year). Capital flight is real and a combination of tools will be implemented. So why gold? Because a RMB denominated gold market is on the way and even if a small portion of gold is traded in RMB, it would represent a watershed shift in reserve currency status.
These are macro events in China that coincide with long stated plans of the government. In order to achieve long term objectives, there will periods of dislocation. Only investors willing to handle short term volatility for long term stability need apply.
Want China Times
China’s five most dismissed weapons developed against the United States and its allies actually pose serious threats to the contest for control over the Western Pacific, according to a piece in National Interest magazine.
Due to the US military’s heavy reliance on the electromagnetic spectrum and network of military satellites, China has devoted a huge amount of resources towards the development of weapons for space warfare. Of those, the first undercover weapon is the Tiangong space station. After the space station becomes operational in 2022, it could be fitted with anti-satellite weapons developed to blind US military forces and cut off their intelligence.
The second unnoticed weapon China has is its manufacturing base, according to the article. China, still holding onto the title of the “world’s factory,” produces everything from barbeque grills to iPhones. In the case of the iPhone, manufacturers have set aside 100 production lines manned by 200,000 workers, churning out an astounding 540,000 iPhones a day by late 2014. With this kind of capability, China would be well able to mass produce weapons systems.
College graduates are the third unrecognized potential weapon the United States should fear, said the report. China expects to have 195 million college graduates in the labor force by the year 2020. The People’s Liberation Army provides the perfect opportunity for graduates who are not able to get white-collar jobs, as the military begins to rely more on advanced technology, the article said. With the involvement of college graduates, the United States and its allies are likely to face a more technically savvy and efficient PLA on the battlefield in the future, said the report.
The PLA is likely to mobilize sea mines as its fourth weapon against the United States in the event of future conflict. During the Gulf War in 1991, one US cruiser and one amphibious helicopter ship were damaged by naval mines planted by Iraqi forces. Twenty-five years later, the US Navy still relies on the same aging minesweepers and helicopters it used in 1991, the piece said.
The PLA is estimated to have between 50,000 to 100,000 naval mines in its inventory. In a future conflict, they will likely be used to carry out maritime area denial operations against the US Navy.
As for the last forgotten weapon, the US must pay more attention to China’s special forces, about whom very little is known to the public.
Dennis Blasko, an expert on China’s special forces, said the PLA maintains eight special forces brigades and three groups or units. The PLA airborne corps under the air force and also has a special forces unit supporting the three airborne divisions, while the navy’s South Sea Fleet has a commando regiment. Even the Second Artillery Corps, China’s strategic missile force, operates a special forces unit.
China is believed to be developing a new DF-5B liquid-fuel missile that will be able to strike any target on the planet, reports our Chinese-language sister paper Want Daily.
The People’s Liberation Army’s current or in-development arsenal of long-range strategic intercontinental missiles (ICBMs) are led by the DF-31A, the DF-41 and the JL-2, all of which feature solid-fuel rockets.
The DF-31A, with a range of 10,000 kilometers, can reach the west coast of the United States. The DF-41 has a longer operational range of 12,000-15,000 kilometers and can carry three or more warheads, though the missile is still in the testing phase. The JL-2, which has an estimated operation of up to 8,000 km, can only be fired from a submarine at sea.
US and Japanese media report that China may have recently tested two ICMBs, the DF-41 and and the DF-5A. Military commentator Gao Feng believes that the firing of the DF-41 was part of regular testing, though the DF-5A test was likely part of basic research to develop a new liquid-fuel missile based on the DF-5 or the DF-5A.
According to Gao, though the DF-31A and the DF-41 are either in service already or nearing that stage, China should still have an interest in liquid-fuel missiles because of their significantly longer distances and higher load capacities. These advantages may be why Russia has recently announced that it is developing a new liquid-fuel missile based on its SS-18 ICBM.
Gao’s suggestion is also consistent with previous analysis of test images from Chinese media that China could be developing a brand new DF-5B liquid-propellant rocket. Compared to the DF-5A, the DF-5B will have an improved engine and superior precision and warheads. Reports indicate that the range will also be boosted to 13,000 km and 15,000 km, enabling the missile to cover the entire planet, while the load capacity will be upgraded to carry from four to six warheads.
The Chinese port is covered in sodium cyanide, with rain set for the next
four days turning the sodium cyanide into Hydrogen cyanide and potentially
creating toxic winds of death. The government has instituted an “artificial
rain suppression system” which is part of the governments weather control technology.
Want China Times
A new threat has emerged in the aftermath of the devastating Tianjin warehouse
explosions last week with the local weather bureau forecasting rain for the
next four days, raising fears that the hundreds of tons of toxic sodium cyanide
stored on site could turn into deadly hydrogen cyanide.
The local weather bureau of the northern China metropolis announced that
thunderstorms are expected from 5 pm to around 11 pm on Monday afternoon, with
rain also forecast for the next three days.
The forecast comes a day after Shi Luze, chief of staff of the People’s Liberation
Army’s Beijing Military Region, confirmed reports that there are “hundreds of tons”
of sodium cyanide at the Binhai Port Area where several catastrophic blasts rocked
the port city on Aug. 12. The death toll currently stands at 114 with around 70
still missing and more than 700 people hospitalized.
Sodium cyanide, commonly used for chemical engineering, fumigation and mining
precious metals, is a white crystalline or granular powder which can be rapidly
fatal if inhaled or ingested because it can interfere with the body’s ability to
use oxygen. The chemical is water-soluble, so if there is rain it could release
poisonous hydrogen cyanide into the air. The US Centers for Disease Control and
Prevention describes hydrogen cyanide as “rapidly fatal.”
“We are monitoring it closely,” Bao Jingling, chief engineer for the Tianjin
Environmental Protection Bureau, said regarding the weather forecast. Though Bao
insisted that “currently it isn’t very serious,” members of the PLA’s anti-chemical
warfare division were dispatched to the scene Sunday, where they could be seen
working in gas masks.
Shi told reporters that workers are trying to clear all sodium cyanide from two
separate sites at the port before the rain hits. However, he also reiterated that
the chemicals posed no threat to people outside the two-kilometer evacuation zone,
which has displaced more than 6,000 Tianjin residents.
“I can responsibly say that there will be no secondary damage to the people,” he
said Sunday, a day after the government evacuated a school near the blast site
when possible wind changes raised concerns of exposure.
Greenpeace has said that early tests around the blast site indicated that the city’s
water supplies have not yet been contaminated with cyanide, but that it did not
“disprove the presence of other hazardous chemicals in the water.” The environmental
protection group urged that the evacuation zone be expanded to five kilometers,
warning that Monday’s expected rain could set off reactions and wash these chemicals
into the earth.
Authorities have however tried to downplay the dangers of impending rain, with the
official Xinhua news agency reporting: “Meteorological experts say the rainfall will
not pose a direct danger to human health, as it has been several days since the blast.
But if the rain dissolves the cyanide particles on the ground, underground water and
soil will be contaminated. The local weather department has devised an artificial
rain reduction plan to reduce possible harms to the environment.”
Meanwhile, China’s top prosecutor, the Supreme People’s Procuratorate, has opened an
investigation into the blasts to look for “possible illegal acts, such as abuse of
power or dereliction of duty and deal with those acts which may constitute crimes,
” according to Xinhua.
Want China Times
When China’s central bank unexpectedly adjusted its yuan central parity system, it triggered the currency’s biggest decline in decades.
So, what exactly happened?
On Tuesday, the People’s Bank of China (PBOC) changed the way it calculated the yuan central parity rate, to close the gap between the rate and the actual trading rate on the money markets.
From Tuesday, the central parity rate has taken into account the previous day’s inter-bank market closing rate, supply and demand in the market and price movements of other major currencies.
Ma Jun, a central bank economist, described the change to the way the central parity rate is calculated as a “one-off” technical correction that should not be seen as the beginning of a devaluation trend.
Just what is the central parity rate?
Each trading day at 9:15am Beijing time, the central parity rates of the yuan are announced against 11 major currencies including the euro, sterling, US dollar and yen. The rates are determined by a weighted average of pre-opening prices offered by market makers. When the inter-bank FX market opens 15 minutes later, trading may only take place within 2% of the rate.
The US dollar is strong and a sharp appreciation in the real yuan rate has hit China’s exports hard. The figures for July slumped by 8%. Furthermore, the central parity rate has gradually deviated from the market rate “by a large amount and for a long duration,” according to the PBOC, which has undermined “the authority and the benchmark status” of the central parity system.
How did markets react?
On Wednesday, the yuan declined sharply for the second day in a row, leading to a heavy sell-off in regional currencies and raising concern worldwide that volatility will become a drag on global economic growth.
Asian stocks fell.
The yuan is expected to remain weak and volatile in the near term.
Is this a deliberate move to stimulate exports?
Tuesday’s move is regarded as another step towards allowing market forces to determine the value of the yuan, but is probably not enough to make much difference to either exporters or China’s trade partners.
HSBC say the move does not mean that China has begun to purposely devalue the yuan.
“In an environment of soft global recovery, the benefits of beggar-thy-neighbor competitive devaluation are neither clear nor easy to reap,” was the bank’s analysis of the situation.
How will this affect the Chinese people?
A weaker yuan makes imported products more expensive and foreign travel more costly.
The Chinese are just getting used to their new prosperity. Shopping has become very important to them, especially shopping for imported goods. Foreign travel for its own sake, but more specifically for shopping, is central to the aspirations of China’s new wealthy classes. Those who plan to study abroad, particularly at American schools, will also feel the pinch.
Is all this good or bad for the yuan’s chances of a quick inclusion in SDR?
The International Monetary Fund (IMF) has welcomed the reform, which will certainly raise the prospects for the yuan becoming part of the IMF special drawing rights (SDR) currency basket sooner rather than later.
The change does not directly affect the push for SDR inclusion, but an IMF spokesman said on Wednesday that “a more market-determined exchange rate would facilitate SDR operations in case the yuan was included in the currency basket.”
What’s the risk?
The depreciation might trigger capital flight, dealing a blow to the stability of China’s financial system. Bloomberg economists Fielding Chen and Tom Orlik reckon that a 1% depreciation against the dollar will suck US$40 billion out of China. While US$40 billion is certainly not chicken feed, with massive foreign exchange reserves, substantial bank deposits and a controlled capital account, China is well set to deal with such an eventuality.
So, what next?
The PBOC has promised more FX reforms along the lines of “market- orientation” and opening up the FX market. More foreign entities are being allowed to participate in China’s financial markets, and the onshore-offshore yuan exchange rate will gradually be unified.
Tsinghua University is the M.I.T. of China, a school I attended in the
late 1990’s, is very close to the Central government. They have been picked
to take down one of the last remaining technical advantages that the U.S. still
has over China…. that of advanced computer chips.
Tsinghua Holdings Co Ltd, a technology conglomerate backed by Tsinghua University, plans to invest at least 30 billion yuan ($4.76 billion) in developing mobile chip technology, highlighting the company’s ambition to challenge Qualcomm Inc’s dominance in the country’s chip market.
“To catch up with Qualcomm as soon as possible, we will pour 30 billion yuan, and probably even more, into the research and development of mobile chips in the next few years,” Xu Jinghong, chairman of Tsinghua Holdings, told China Daily in an interview on Tuesday.
Tsinghua Holding said a certain proportion of the money will come from government funding and its partners. In February, its unit Tsinghua Unigroup Ltd said it has received 10 billion yuan from governments to invest in chip companies.
“Frankly, compared with global competitors, we are still three-to-five years behind in technology, especially in cutting-edge 4G and 5G products,” Xu said, “but if we don’t close the technological gap, we will never win.”
The comment came after Tsinghua Unigroup Ltd filed a plan to buy US chipmaker Micron Technology Inc for $23 billion. Xu said earlier it was still in discussions for a potential deal.
“We will continue to expand our presence in the integrated circuit industry through both acquisition and self-research,” he said, adding chips will be one of the focuses of the Beijing-based company.
Roger Sheng, senior analyst at research firm Gartner Inc, said the government’s emphasis on the semiconductor sector is the biggest advantage for Tsinghua Unigroup.
“Few tech companies in China have such a large amount of capital at their disposal as Tsinghua Holdings does,” Sheng, said adding “despite its current technological weakness, it has ambitions and is acting very quickly”.
“Qualcomm’s pioneering efforts in the sector also established a successful business patten which Tsinghua can follow,” Sheng said.
Tsinghua Holdings’ intensified efforts to boost its chip-related resources come as the Chinese government seeks to reduce the country’s reliance on foreign technology, on worries that it may hurt national security.
The company evolved into the largest chip firm in China after it acquired Spreadtrum Communications Inc, the world’s third-largest mobile phone chip maker, and RDA Microelectronics Inc, the fourth-largest, in 2013.
“If we can manage to catch up with Qualcomm technologically, our innovation capability, the huge smartphone market in China as well as the labor cost, which starts rising but is still lower than that of the US, can offer us considerable commercial opportunities,” Xu said.
Earlier this month, Tsinghua Holdings announced it has made a breakthrough in chemical mechanical polishing, an important process in manufacturing chips. One of its unit successfully developed the first 12-inch polishing machine in China which could planarize semiconductor wafers to an extent that every square of a nanometer (billionths of a meter) is flat.
“The machine shows that we are the first Chinese company to have mastered the technology, and enables us to produce extremely tiny chips for smart wearable gadgets,” said Li Zhongxiang, vice-president of Tsinghua Holdings.
The Shale revolution has contributed greatly to reducing the U.S. trade deficit
by decreasing imported gasoline. The story no one is reporting, however, is that
the manufacturing goods deficit is exploding and its worse than it has ever been.
The U.S. had a total deficit of $505 billion in 2014 and that number is
sure to grow in 2015 as new monthly records have been set going over $50 billion
in a single month.