Can someone explain to me what the effects of China's artificial devaluation of the yuan vs the dollar are? I understand that they are doing this to make themselves more competitive as an export economy, but can they really keep it up? I mean, to maintain this valuation, they have to constantly sell yuan and buy dollars, but they can't do that forever, right?
So when the yuan finally increases in value, will the dollar's value crash?
Maybe the dollar's value will crash relative to the Yuan. If you make a bet like George Soros that the Yuan is going to rise in value, what would that bet look like?
One of the problems with the bet is that you are betting in the opposite direction from Soros. China can just print more Yuan, and suddenly Yuan decrease in value. Add to this the ridiculous levels of pointless internal investments, seemingly done to inflate China's GDP. And finally, there are severe problems with Chinese equity markets that make it scary to bet on Yuan against USD.
I think at some point in the future, China will stop having an export economy, because advances in manufacturing technology and automation will obviate the need for cheap labor. And at some other point, China will start investing sensibly in internal matters. I have no idea how to translate this into USD or CNY, but if I were in China, I would want the transition to happen gradually. A gradual transition avoids destroying the manufacturing sector overnight.
I don't know if this is related directly, but seeing as Soros is in on the largest gold mining company in the world and other gold companies related etf's[0], doesn't that speak somewhat to the type of bet he's making in this landscape?
> I mean, to maintain this valuation, they have to constantly sell yuan and buy dollars, but they can't do that forever, right?
In that direction, yes they can do it forever because they can keep printing yuan. The dynamics of the Soros' bet was in the other direction: The Bank of England needed to expend foreign reserves in order to buy pounds, and the supply of foreign reserves is finite.
The other interesting dynamic in yuan/dollar: China owns a sizeable amount of treasuries (since the US keeps running a trade deficit, they turn around and invest in interest-bearing bonds). The treasuries are denominated in dollars: If China decided to dump all the treasuries on the market at once (driving US interest rates through the roof, and the price of the T's down), the US gov't would just buy it's debt back for pennies on the dollar. There would no doubt be chaos, but it would be a very different dynamic than the BoE fiasco.
"The treasuries are denominated in dollars: If China decided to dump all the treasuries on the market at once (driving US interest rates through the roof, and the price of the T's down), the US gov't would just buy it's debt back for pennies on the dollar."
Buy with what? With more printed dollars? When someone so large as China starts dumping cheap U.S. bonds (dollars) on the wild pulling down currency's value, it won't be the only acting player. Nobody wishes to loose value by holding to a rapidly depreciating currency, so expect a shopping spree all over the world. It all comes down to faith. Small players can't trigger such big events, but China could. It won't matter that U.S. debt problem gets solved if its currency looses monopoly.
The expected effects are the large foreign cash reserves and strong exports.
The unexpected effects have been the massive growth of China's underground banking system and the housing bubble. To keep exchange rates low China needed to keep interest rates low. They did this by legislating Banks' deposit account interest rates. In turn this caused everyone to look elsewhere to invest their life's savings.
Thus we get large ghost towns and ship yards acting as unregulated banks. I expect this tactic to burn China bad at some point in time.
Yuan to Dollar peg was maintained because the currency is not freely trade-able, and it does not follow market economics.
Chinese government has been easing control and letting Yuan slowly inch upward in the past 10 years or so, and nothing catastrophic seems to have happened yet.
So when the yuan finally increases in value, will the dollar's value crash?