Saturday, March 1, 2014

Why Is China Depreciating Its Currency?

China’s currency, the yuan, or renminbi, tumbled by the most on record last month – a 1.3% drop in February against the greenback. In fact, the yuan swooned to a 10-month low of 6.1815 per dollar. That’s the largest decline since China unified official and market exchange rates in 1994.

This happened because the whisper is the People’s Bank of China will double the yuan’s trading band by the end of June.

Officially, China is moving toward looser exchange-rate controls to promote the yuan in global trade and finance.  Unofficially, I think they’re trying to boost their economy by juicing exports. One way to do that is with a cheaper currency.

In other words, this may be the first shot in the global currency devaluation wars that many have warned about.

Why does this matter for gold? Ordinary citizens use gold to protect themselves from inflation. And the citizens of China, all 1.35 billion of them, already have a cultural affinity for gold.

China's cultural affinity for gold explains why that country's imports and sales soared to new records last year.

What do you think ordinary Chinese will do if inflation in China heats up from its officially mild 2.5% rate?  

No one has a crystal ball, but inflation is likely to happen if China’s currency falls in value -- because a falling currency makes imported goods and materials more expensive.

Do you think ordinary Chinese will try to protect themselves from inflation by purchasing more gold?  There’s no way to know for sure, but a yuan will get you a dollar that’s just what they’ll do.

1 comment:

  1. No. The PBOC smacked their currency to kill off the carry trade.

    And you might want to ask yourself whether there's 1000 tons of gold in China that's been collateralized to back shadow banking loans.