Beijing's 'Thursday surprise'

[Dover]

Beijing's 'Thursday surprise'
By David M Lenard

HUA HIN, Thailand - At 8:00 local time on Thursday, July 21, the People's Bank of China (PBoC), China's central bank, released the text reprinted here. The most important parts of the Announcement of the People's Bank of China on Reforming the RMB Exchange Rate Regime

Despite the deliberately bland and enigmatic wording (the PBoC has certainly graduated from the Alan Greenspan school of baffling, Solomonic pronouncements), the announcement sent shock waves through global financial and currency markets and was expected to cause significant readjustments in the global economy.

China's abandonment of the US dollar peg not only changed almost 11 years of currency policy but directly reversed government statements from only days before. China's soaring trade surpluses and foreign currency reserves had prompted foreign pressure to allow the yuan to appreciate, and speculation that a move was imminent reached fever pitch in mid-May. But the PBoC successfully damped down such talk over the last several weeks, only to catch currency markets flat-footed with Thursday's move. Thus, even if the revaluation itself had been expected, its timing was not.

Beijing's 'Thursday surprise' essentially consisted of two policy changes, each significant by itself. First, where previously 8.28 yuan had bought 1 US dollar, as of July 22, it only takes 8.11 yuan to buy a dollar; ie, the yuan was allowed to appreciate 2.1% against the dollar. Second, whereas the yuan had been officially valued in terms of dollars and backed only by dollars, China's currency is now valued in terms of an adjustable "basket of currencies"...cont'd

http://www.atimes.com/atimes/China/GG23Ad05.html

[NMDemDist2]

1. hooo boy, I'm no economist (I don't even play one on TV) and I didn't

stay at a Holiday Inn last night, but this sounds like it will have big effects on our economy and buying power.

can you tell me Dover, what you see this doing to the US economy?

and BTW :hi: nice to see you out of our usual haunts LOL

[Dover]

2. Hi AzDemDist6 ! No I wouldn't hazard a guess..BUT here are some articles

you might want to peruse:

Daily Forex Commentary
By Jack Crooks

Quotable
"Contrariwise," continued Tweedledee, "if it was so, it might be; and if it were so, it would be: but as it isn't, it ain't. That's logic."
- Lewis Carroll

FX Trading
The announcement by China to "revalue" or "re-peg" or "dirty float" the yuan by 2.1% against the US dollar was as clear as mud. The implications and fallout could be significant. We can conjecture until the cows come home - it makes for a lot of good stories. But we just don't know how it will play out. Already, much ink has been spilled on the revaluation. We will take a look at a couple of the potential implications we are thinking.

Will the revaluation lead to higher US interest rates?
Most believe it is only a first step that will lead to a continuing freeing of the Chinese currency. Already, we have seen other Asian currencies rise sharply in value. This is because their main competitor on the export front is China - a rising Chinese currency allows them to let their own currencies appreciate accordingly.

If Asian countries are no longer concerned, or at least less concerned, about capping the value of their currencies relative to China - effectively relative to the US dollar - by implication it means they will not need to hold as many US dollar reserves. This is why many are concerned US interest rates could move higher - no longer will the Asian region need to hold as many, or purchases as much, US Treasury paper going forward.

Is this a tiny first step to an eventual free-floating Chinese currency?
So far, that seems the consensus. Already, JP Morgan Chase predicted the yuan would gain a further 5% by year-end. But China must be careful. It is why they only moved 2.1% instead of the 10%+ the US Treasury was pushing for. And way below the 40-50% some believe the yuan is undervalued against the dollar.

Why so careful? Why not a move to free-floating and be done with it? Beneath the bullish view of many, China is dealing with some significant problems within its economy - excess capacity in key industries, falling profits for companies in those industries, a slowdown in the property market, banks that are still simply central government conduits, and growing social tension. China needs to employ a lot of people to maintain social stability. With the problems mounting within its economy, a one-off large revaluation could lead to money pouring out of China, draining liquidity at precisely the wrong time....cont'd

http://www.atimes.com/atimes/Global_Economy/GG23Dj01.html

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India Pops the Champagne

http://www.atimes.com/atimes/South_Asia/GG23Df07.html

[NMDemDist2]

3. the snippets you posted make my intuition tell me it will be harder

to get the Asian countries to continue to buy up US debt of course making our interest rates go up. what happens if we have a treasury bond sale and nobody comes?

[Dover]

4. Ummmmmmmm........we stand on the deck of the Titanic and sing

"Don't cry for me Argentina".

That's one country who knows all about poor credit.

[wli]

5. that's already happened a number of times

It's unclear to me, however, who bailed us out after the reports of such came out.