Currently numerous economic observers, participants of financial markets and currency experts are focused on the Chinese Yuan. Is its exchange rate objective? Will it become a new global reserve currency and when can it happen? The world’s best brains are currently pondering over these questions.
In mid May Bloomberg conducted a survey on the perspectives of China’s national currency. 1263 investors, traders and analysts for numerous world-famous banks and investment funds participated in the survey.
The weak and strong sides of the Chinese Yuan:
The experts of draw your attention to the following factors:
1. Yuan has a great future. 57% of the respondents assume that the Chinese Yuan may become a freely convertible currency within the next 5 years.
2. China’s investment attractiveness will only grow. 51% of them are sure that the Chinese authorities will do their best to improve the investment climate in the country.
3. Yuan as a safe heaven asset. Only 19% of the respondents say that the Chinese currency may become a full-fledged reserve currency like USD, JPY and EUR.
4. Yuan as a global reserve currency. 31% ofthe respondents say that the Chinese currency will definitely become one of the global reserve currencies within the next 10 years.
5. Should the Chinese Yuan be trusted? Only 15% of the respondents doubt that the Chinese currency will ever be able to compete with USD, JPY and EUR.
Most investors feel optimistic not only because they want the Yuan to strengthen in order to get an opportunity to invest more freely in the world’s 2nd largest economy. They are also impressed with the dynamics the Chinese currency has shown over the last 6 months.
Hu Jintao’s statements and China’s plans for 2011:
Before his official visit to the US in Jan 2011 Hu Jintao, President of the People's Republic of China, gave interviews to «The Washington Post» and «The Wall Street Journal»:
· The US Dollar is in the past. China’s leader said that the world currency system (with the US Dollar dominating in it) was a vestige of the past.
· Yuan as a global currency. Hu Jintao said that the Chinese authorities were doing their best to make the Chinese Yuan a global currency. However he didn’t specify the time needed to reach the goal. At the same time Timothy Geithner, Secretary of the US Treasury, blamed China for the slow revaluation of its national currency, which, he said, was too undervalued.
· Shanghai as a place for foreign investors. Shanghai was chosen as a place for an experimental program aimed at converting the Yuan. It is planned to allow the big-scale foreign companies with offices in Shanghai to issue bonds and to publicly offer their stocks. In early 2011 the offices of foreign companies in Shanghai were to get an opportunity to operate the Chinese securities within the territory of Shanghai. The Chinese Yuan is planned to be used in trading index funds, bonds, oil futures etc. Moreover, for the first time the US companies were allowed to sell bonds for yuans in Hong Kong in order to finance Chinese projects.
When and how the Chinese Yuan will be able to become a freely convertible currency?
China’s ambitious plan to make the Yuan a global reserve currency consist of several parts:
1. New offers for exporters and importers. They should settle accounts with their partners in yuans.
2. China becomes more open for foreign investors. China will have to open to them the long-term capital market.
3. There will be some incentives for those foreign banks that will decide to replenish their currency reserves with the Chinese Yuan.
4. Attraction of foreign investors. Foreign companies will be allowed to make direct investments in the yuans taken from their own reserves.
Is the Chinese Yuan conquering the world?
The Chinese Yuan has already become the regional currency in South-Western Asia. China is the main trade partner for most countries in the region.
1. Mutual settlement of accounts in yuans. Vietnam, Thailand and even Russia are allowed to settle accounts with China in yuans for the sake of simplicity.
2. In April the People’s Bank of China announced about its decision to expand the use of its currency in cross-border trade.
3. Growing trading volume. Over the 1st 4 months of 2011 the volume of China’s cross-border trade reached 530B yuans (or $ 81,54B), which exceeds last year’s value (500B yuans ($78,1B).
4. The New-York branch of the Bank of China is now allowed to offer yuan deposits.
5. The BRICS’s decision. During the last BRICS summit the members agreed to use their national currencies for mutual settlement of accounts and lending. Consequently the Chinese currency has a bring future in this field because over 1/3rd of the trade dealings around the world are made by the developing economies.
6. The IMF’s plans. The IMF is planning to include the Yuan in the currency basket (it includes USD, EUR, JPY and GBP) which determines the price of the SDR (Special Drawing Rights) – the IMF’s non-cash means of payment.
7. Yuan-denominated bonds. Since 2009 China has been issuing the 50-year bonds denominated in the Chinese Yuan. These bonds are very popular with investors.
8. However, Beijing is not in a hurry to make its currency fully convertible. The Chinese authorities are aware that it may result in a loss of control over the major sectors of the country’s banking system. But at the same time the restrictions imposed on the flow of capital prevent China from entering the global markets, which contradicts China’s global ambitions.
What factors prevent the Chinese Yuan from ousting the US Dollar?
Some investors seriously question the stability of China’s political system and economic growth:
· Poverty. China is still a poor country as compared with the US, EU and Japan.
· The banking and financial systems of the contemporary Chinese Republic are still not developed enough, which prevents the domestic currency market from being more open.
CHY perspectives:
According to the Department of Masterforex-V trading system , USDCHY continues the long-term trend in the form of the “Hound of the Baskervilles” pattern by Elder/MF.
At this point USDCHY is forming wave c(C ) of Weekly. It is still too early to consider a trend reversal. To do that the currency pair will need to from a bullish wave of the bigger timeframe and break above the MF pivot and sloping channel (as shown below):
and Market Leader offer you to participate in a survey. Please, visit the Academy’s forum and answer the following question:
Will the Chinese Yuan manage to become a freely convertible currency within the next 5 years?
· Yes, it obviously will
· Yes, it probably will
· No, it won’t. The role of the Chinese currency is overstated.
