Yuan - Dollar - Gold - Forex - Currency News

"For the first time in world history, every country is operating with a fiat currency. This is incredibly dangerous as there is little protection against the ravaging of savings and earnings by governments and central banks. Fundamentally, the various currencies are all the same. The Dollar, Yen, Euro, and Yuan are all pieces of paper that derive their value from public acceptance and government enforcement. Governments and central banks are playing a tricky game, a confidence game with the public. More dangerous, is that they are tempting the time-tested laws of economics. The price of gold, silver and all commodities will explode in all currencies if and when the market decides there is too much money in the global financial system."
China will raise the reserve requirement ratio by half a percentage point to 12 percent for commercial banks from August 15, the People's Bank of China (PBOC) announced on Monday.

"The move does not come as a surprise seeing as almost every economic index is overheating," said Song Guoqing, an economist with Beijing University.

"However, half a percentage points is not enough -- it can't even absorb the newly-added foreign exchange reserves," Song added.

"China's forex reserves go up by about 30 billion U.S. dollars a month while loans of commercial banks totaled 25 trillion yuan at the end of June," Song explained. "This means that a half-percentage point rise can only absorb 125 billion yuan a month."

China's gross domestic product (GDP) rose 11.5 percent in the first half, after it grew 11.9 percent in the second quarter, according to official data.

This is the sixth time China has raised the reserve requirement ratio to curb China's excess liquidity, following an interest rate hike announced last Friday in which China raised the one-year benchmark deposit and lending rates by 27 basis points to 3.33 percent and 6.84 percent respectively.

Meanwhile, the State Council, or cabinet, announced last Friday the reduction of tax on the interest on personal bank savings from 20 to five percent from August 15.

However, the measures, aimed at curbing excessive liquidity, were absorbed surprisingly quickly by the stock markets. Despite the interest hike and tax cut, the country's stock markets kept rising this week when other stock markets fell.

On Monday, the benchmark Shanghai Composite Index hit a record 4,440.77 points while the Shenzhen Component Index closed hit a record 15,060.86 points

"The measures just can't catch up with the overshooting economy," Song said, "so there will be more policies coming out."

The central bank said the move was aimed at "strengthening management of liquidity in the banking system and rationalizing lending growth".

PBOC statistics show that China's foreign exchange reserve reached 1.33 trillion U.S. dollars at the end of June, up 41.6 percent on the same period last year.

A total of 266.3 billion U.S. dollars was added to the country's foreign exchange reserve in the first half, 144 billion U.S. dollars more than a year ago, said the central bank.

The six-month rise is higher than the whole-year rise of 247.3 billion U.S. dollars in 2006.

Guo Tianyong, director of the Chinese Banking Research Center in the Central University of Finance and Economics, said higher deposit reserve ratios are an effective means of retrenching capital held by banks, so as to limit the growth of bank loans and curb excess liquidity.

According to the central bank, China's commercial banks lent up to 2.5 trillion yuan (329 billion dollars) in the first half of the year, approaching 80 percent of last year's total. In June alone, these banks approved loans valued at 451.5 billion yuan (59.4 billion dollars).

The central bank has raised the benchmark interest rate of RMB deposits and loans three times this year.

The central bank said in a statement released early this month that it will maintain its prudent monetary policies, tighten control over bank liquidity to maintain a proper liquidity level and prevent excessive growth in monetary credit.

With the rising inflation in the first half year, many agencies predicted that more control policies will be carried out to prevent overheating of China's economic growth in the second half.

Joe Nicholson demonstrates in a post on financialsense.com that:

"In the Q&A portion of his presentation Bernanke was explicitly asked about the relationship between money supply and inflation, and his answer was incomplete, if not outright evasive. What he concealed behind the smokescreen of academic terms was that the lag time between a massive injection of new money and a rise in prices throughout the economy can be extended and perpetuated, and more clandestine inflation perpetrated, if people believe hard enough that inflation pressures in food and energy are temporary and insignificant.
US Treasury Secretary Henry Paulson arrived in China on Sunday, kicking off a visit aimed at convincing the Asian giant to implement much-needed economic and environmental reforms more quickly.

US diplomats said Paulson was first headed to Xining, the capital of the vast northwestern province of Qinghai, where China has enacted a series of environmental protection initiatives near its largest salt-water lake.

Paulson, who heads to Beijing on Monday, will meet with government officials to discuss the US-China Strategic Economic Dialogue (SED) launched last year.

The forum covers a range of economic and environmental issues, but the issue at the forefront is China’s yuan, which is seen by lawmakers in the United States as grossly undervalued.

Paulson’s visit comes amid growing pressure to curb the burgeoning US trade deficit with China and moves in the US Congress to punish Beijing for what some say are unfair trade policies.

Last week the Senate Finance Committee overwhelmingly approved a bill requiring the Treasury to identify nations with ‘fundamentally misaligned’ currencies, potentially opening the door to economic sanctions against Beijing. US lawmakers say the undervalued yuan makes US-bound exports cheaper, thereby fuelling the trade deficit, which hit $232.5 billion last year.

“There is no doubt that China and other nations have been undervaluing their currency to give themselves an advantage,” said Republican Senator Lindsey Graham, a member of the committee.

“For too long the game has been rigged against American business.”

But Paulson said Friday that lawmakers were sending the wrong message by threatening to punish Beijing. “We would like to see the Chinese move and show more flexibility,” he said.

“The right way to deal with a sovereign nation is not through protectionist actions, but by making the case to them very directly as to why it’s in their best interests ... that they proceed with their reforms.” China manages the yuan against a basket of foreign currencies. But it maintains that, after ending the yuan’s peg to the US dollar in 2005, its currency has appreciated at a steady pace.
"Couched in an appeal for better information in how to steer public consciousness towards that end, the speech was another shameless attempt to understate inflation. But this always means two things: one, there is and always will be inflation, and two, it should just be ignored by the public. The bottom line is that Bernanke's speech was exactly the sort of rhetoric you'd expect from a man prepared to undertake a massive devaluation to try and stave off a credit crisis."