US news. With 79 votes against 19, US Senate has confirmed to discuss the bill that will enable American government to introduce compensation duties on goods, imported from the countries, where national currency is artificially underrated, resulting in export subsidizing.
It is widely known that if the law is adopted in the USA, China will become the first country to which it is applied. Provided that this happens, what shall investors expected and how dangerous it is internationally?
According to Chinese Community of Forex Academy and Masterforex-V Trading System , Beijing, represented by the People’s Bank of China, Ministry of Foreign Affairs, and other governmental authorities, has already vigorously criticized the bill on compensation duties, regarding it as discriminating:
■yuan binding to dollar. China removed hard binding of yuan to dollar already in 2005. By 2008 Chinese currency has been set at the point of 21% in relation to US dollar; then Beijing was holding back yuan at the point of 6.83 for $ 1 till summer 2010. According to IMF, during the previous year yuan has increased by 5.5% in relation to American currency, but still remains underrated at least by 23%;
■major complaints to China. During the recent years complaints about the low rate of Chinese yuan have come not only from Washington – Europe is neither excited about cheap Chinese export. The issue of strengthening Chinese yuan in the nearest future is raised during two-sided and multi-sided international meetings with Chinese leaders.
Are the actions of American senators objective? How will the adoption of this bill influence relations not only between America and China, but also world economy in general?
Yuan danger: what is the US fear?
Experts of suppose that the fears of American government are clear:
■ trading relations between China and the USA. According to senators, cheap Chinese goods are the main reason of the deficit in trading relations between America and China, which last year amounted to $ 237 bln.;
■ US balance of payments. The share of imported to America Chinese goods amounts to about 60% of overall deficit of American balance of payments;
■ strong yuan is a threat to dollar. US senator and a member of the Democratic Party Charles Schumer, a law draftsman of the bill on compensation duties, is certain that weak yuan literally kills American manufacturers and eliminates the competitiveness of American goods at US and global markets;
■ more competitive US goods. Senator Greg Reed highlights that compensation duties on Chinese goods will not only increase the competitiveness of American goods, but also create new jobs in America, which is a good strategy for quicker economic recovery.
According to expert Yevgeniy Olkhovskiy, American government has almost used out its resources to fight for national economic recovery: consumption is declining, investments are vanishing, and state expenditures are being cut. The growth of export potential probably is the last available tool at the exposure of American government. This is the reason of the protective bill.
However, ICM Brokers analytics explain that despite the fact that the bill under consideration is supported by both Republicans and Democrats, the White House remains silent:
■ new jobs in the USA. At the same time, the plan of creating new jobs in American economy may remain unrealized, for customers will buy cheap Chinese goods and services, instead of more expensive American ones. In this reference, President Barack Obama is facing a difficult situation, as China is the main partner of the USA in terms of foreign trade. Worsening relations between America and China or even the start of trade war are not likely to add votes to the current president during next year elections for presidency;
■US views. Attitudes to the bill on compensation duties in America itself are different. According to Washington Post, 51 US commercial organizations have already expressed negative attitude to this bill, being afraid that the consequences will have counter effect.
Beijing position: American economy is the main problem
Beijing position is also clear: it directly claims that the question of underrated yuan is raised in Washington every time when American economy faces problems:
■explanation of the CB of China. Representative of the Central Bank of China claimed that imbalance of goods exchange between the USA and the PRC has more than one reason; in addition to weak yuan, there are several others, of different nature. The Senate’s attempt will not solve American domestic problems, but it may result into large-scale trade war between the largest economy and the largest exporter worldwide;
■essence of the law. Representatives of the PCR Ministries of Foreign Affairs and Trade pay attention to the fact that the points of the bill under consideration breach several major principles of the World Trade Organization;
■yuan danger for China. Beijing supposes that if yuan strengthens rapidly, it will undermine inner reforms in China or even cause national economic crisis;
■ “practice what you preach” – Latin saying, which can be perfectly related to the United States, who print money non-stop, export inflation, and shift their economic problems to the rest of the world.
Eventually, why can Japan and Switzerland weaken national currencies in order to protect their exporter, whereas Beijing cannot? American senators should keep in mind that American treasury bonds, worth more than 1 trn. dollars, are placed in Chinese reserves; in case of trade war, Beijing can simply put a part of US T-bonds on free market, having undermined already weak American economy. Therefore, tighter economic relations between America and China are not desired worldwide.
Yuan prospects: is the USA in danger?
According to the experts of the Department of Masterforex-V Trading System, when the level of correction wave increases, the rate of Chinese yuan will continue its bear trend, which is targeted at strengthening national currency.
On its way bear trend will face support at the points of 6.35 and 6.30. Long-term trend reversal will become possible only when pivot MF and sloping channel MF are passed (See the chart).
“Market Leader” and hold a questionnaire in the forum for traders and investors: will US Congress adopt the bill on compensation duties?
• yes, it is Washington’s final argument;
• probably not, for this law can then be applied not only to yuan;
• no, it will be mere rhetoric, and Beijing will accept some concessions.
