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Nations Notice As China Allows Yuan To Lose Value

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Nations Notice As China Allows Yuan To Lose Value

Exchange-rate strategies in Beijing in regards to the U.S. dollar, as well as thirteen other currencies, are still causing uncertainty and doubt.

The money in China, termed the yuan, has experienced a fall of around 3% against the dollar since the start of 2016.

During this same period, the yuan has fallen about 6% against 13 other currencies from around the world.

The graph below shows this drop:

yuan 1

Chengdu, China

Beijing has somehow allowed the yuan to press against the U.S. dollar during 2016 without causing an uproar of protests from its trading partners.

However, things seem to be changing as of late.

A larger depreciation against a much broader selection of currencies is garnering more and more attention.

This past weekend, there was a two-day meeting where Group of 20 finance chiefs gathered and discussed this recent depreciation of the yuan.

The meeting was held in Chengdu, a southwestern city in China.

During this conference, officials from a few of China’s major trading rivals expressed that they were having concerns due to the decline of the yuan, as seen this year.

The yuan has fallen almost 6% when compared to a group of thirteen separate currencies.

Out of these thirteen, the dollar, euro, and yen are included.

When isolated only to show the yuan against the dollar, there was a 3% drop.

The emergence of a weaker yuan against varying other currencies can cause Chinese exporters to have an advantage over those from different countries in global markets.

Taro Aso, the Japanese Finance Minister, spoke to reporters on Saturday and said that he told the Group of 20 to keep a close eye on the future direction of the yuan, along with the Chinese economy as a whole.

Privately other Western officials mentioned that they had offered advice to China, cautioning them against weakening the yuan broadly.

Both of these remarks illustrate that the exchange rates in China are continuing to be a great source of doubt and uncertainty for both investors and global policy makers.

The yuan has gone through two rounds of devaluations in the past year alone, which has triggered a swell of panic selling in markets all over the world.

This devaluation has also exacerbated the money flow being sent out of China.

The central bank in China has also improved its communication in regards to the mechanism that controls yuan-pricing.

This improvement has helped to ease the doubts and nervousness surrounding the most recent instance of yuan depreciation, which began in late May of this year.

Many of the economists within China have suggested that the yuan should be watched but allowed to continue to weaken while the country sees a slowing economy.

However, the People’s Bank of China has reported that they have had to be careful to monitor this weakening.

By keeping it gradual, they prevent the possibility of it leading to speeding up capital outflows.

The United Kingdom’s decision to leave the European Union on June 23, 2016, has assisted in speeding up the yuan’s descent due to the central bank benefitting from the expanding dollar to devalue the yuan.

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This led to the yuan weakening 1.6% against the dollar, as well as 1% against the other 13 currencies in the first two weeks after the decision for Britain to exit the EU, a move termed as Brexit.

When the United Kingdom made the choice to secede after a harrowing vote on whether or not to remain in the European Union, it led to many consequences on economies all over the world.

China and the yuan are just one of the many markets and currencies affected.

Last week, the central bank made the decision to keep the yuan mainly stable against the currency basket and guide it higher against the greenback.

This decision came right before the weekend G-20 meeting in Chengdu.

The exchange rate maneuvering in Beijing has been mainly driven by the dollar.

The PBOC focused on anchoring the yuan to the dollar while the greenback was weak, letting the yuan collapse against the basket.

On the opposite end of the spectrum, the PBOC allowed the yuan to weaken when the dollar advanced, leading to the yuan being kept mostly stable against the basket.

In 2016, the dollar has strengthened less than it has reduced, leading to a weaker yuan against the basket than against the dollar.

The graph below shows the China Exchange Rate Pressure from 2000 to 2016.

As one can see, it plummets near the end of 2015:

yuan 2

Chi Lo works as a China economist for BNP Paribas Investment Partners, which is the asset-management arm of the bank based in Paris.

Lo said that he continues to believe that the Chinese central bank only desires stability for the yuan because a continued weakening of the yuan could end up renewing capital outflows.

Analysts from Goldman Sachs Group Inc.  say that there was an estimated jump to $49 billion in outflows last month from the $25 billion that occurred in May.

This increase is seen as a result of the decreasing yuan.

Lo also said that the thing they do not know is whether the PBOC desires a stable trade-weighted exchange rate or if they want a stable yuan-dollar rate, which would be measured and determined by the yuan’s value against the basket of currencies, which includes the euro, dollar, and yen.

Larry Hu, a China economist at Macquarie Group LTD., which is an investment bank based in Sydney, said that the combination of the rising depreciation of the yuan and the monthly trade surplus of around $50 billion in 2016 would most likely raise one or more concerns among the trading partners of China.

Due to pressure mounting from the rest of the world, as well as the declines and devaluations that the yuan has experienced and suffered from this year, Mr. Hu says that there is a very limited amount of room for any more yuan depreciation against the currency basket for the remainder of 2016.

As you can see below, China hit an unusually high trade surplus at the beginning of 2016 and the end of 2015, though the economy has been slowing for the majority of this year.

yuan 3

After the Group of 20 meeting that concluded on Sunday, which was led by China, the group reaffirmed its pledge to refrain from engaging in beggar-thy-neighbor devaluations.

A public statement by PBOC Governor Zhou Xiaochuan stated that the exchange rate of the yuan against the currency basket is stable and being kept that way.

This, he said, has led to an increased strengthening of the market confidence around the Chinese currency.

Another notable event occurred when a senior United States Treasury official made note of the fact that Beijing has recently intervened to prevent the yuan from seeing any further falls or decreases.

The United States welcomed this action and described it as not being the type of intervention that the U.S. would interpret as being designed to obtain an unfair or unwelcome advantage.

However, it is not to say that Washington has concluded in its attempts to push Beijing into continuing its exchange-rate reform.

The Treasury official remarked that because Beijing does not have full transparency on their intervention, it is challenging and difficult to have 100% confidence in them.

The graph below shows the consequences that Brexit, Britain’s exit from the EU, has caused within currencies around the globe, in particular, the yuan.

This could lead to exporting risks with the overseas sales, as well as a concern regarding the capital outflows.

yuan 4

Conclusion

 –    Since the start of 2016, currency in China has seen a fall when compared to both the dollar and a basket of around thirteen other currencies.

–    Brexit has created an uproar in global markets and currencies everywhere. With a falling euro and economic upheaval all over Europe, it’s no wonder that Asia is suffering too due to the surging dollar.

–    China has elected to attempt to control the yuan’s depreciation by keeping a close eye on the value to ease uncertainty from trade investors, as well as renewing capital outflows.

–    After meeting over the past weekend in Chengdu, the G-20 came to the decision to refrain from any behavior that could fall under beggar-thy-neighbor devaluations.

–    The United States Treasury seems to approve of China’s decision regarding their economy and actions following the depreciation of the yuan, though they warn that there is still not complete confidence in Beijing’s exchange rate program due to the lack of transparency.

–    Some have cautioned China against trying to control the yuan and instead advise them to maintain stability while paying attention to the concerns coming from across the world.

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Republicans Ready To Finalize Stimulus Bill As Dems Continue To Squabble

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Republicans Ready To Finalize Stimulus Bill As Dems Continue To Squabble

Treasury Secretary Steve Mnuchin and White House Chief of Staff Mark Meadows met with House Speaker Nancy Pelosi and Senate Minority Leader Chuck Schumer on Saturday. This is a rare weekend session to try and break the stalemate between Republicans and Democrats over the next stimulus bill.

No deal was finalized. However, Mnuchin said he and Meadows were willing to meet with Democrats every day. This can go on until an agreement is reached.

The sticking point for Republicans is an unwillingness to extend the $600 per week unemployment benefit. They feel the amount needs to be pared down to a more reasonable $200 per week so that unemployed workers have a financial incentive to find work instead of making more money by remaining unemployed.

Unsurprisingly, Democrats want the $600 to be reinstated and have tied it to a host of other demands that have nothing to do with the pandemic, like their insistence on approving $1 trillion to be sent to state and local governments to fund budget shortfalls, food stamp increases, and assistance to renters and homeowners. Mnuchin said that’s “something we’re not going to do.”

Democrats Refuse to Agree

Mnuchin appeared on ABC’s “This Week” yesterday. There, he said the White House understands the need for extra unemployment benefits. However, he also says the Democrats are holding up the deal.

“The president is very concerned about the expiration of the unemployment insurance,” Mnuchin said, adding “We proposed a one-week extension at $600 so that, while we negotiate a longer term solution, at least all those people don’t lose their money. I’m surprised the Democrats won’t agree to that. They’re insistent on having a larger deal.”

He also said that Republicans aren’t willing to burden our country with more debt.

“There’s obviously a need to support workers, support the economy,” Mnuchin said. “On the other hand, we have to be careful about not piling on enormous amounts of debt.”

Until a Deal Is Made

He added that the White House supports a one-week extension of the $600 per week until a deal is struck. However, he believes $200 is a more appropriate amount for the extra weekly benefit.

“There are cases where people are overpaid,” Mnuchin said.

He did add that both sides agreed on the need for another $1200 stimulus payment for Americans, and that once approved, the checks could be in the mail within a week.

Both sides have agreed to meet daily until a deal is struck, and at least one Democrat sounds optimistic that a deal will be reached sooner rather than later.

“This was the longest meeting we’ve had and it was more productive than the other meetings,” said Schumer. “We’re not close yet, but it was a productive discussion — now each side knows where they’re at.”

Chief of Staff Meadows, however, doesn’t expect a deal is forthcoming. Appearing yesterday on CBS’s “Face The Nation,” Meadows said, “I’m not optimistic that there will be a solution in the very near term.”

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Here’s Why The ‘Cockroach Portfolio’ Is Gaining Popularity

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Here’s Why The ‘Cockroach Portfolio’ Is Gaining Popularity

Ray Dalio, the founder of Bridgewater Capital, calls it the “all-weather portfolio” and it’s helped his investment management firm amass roughly $140 billion in assets.

Former Libertarian presidential candidate Harry Browne called it his “fail-safe investing” portfolio. Additionally, It just had its best three-month return ever. It returned 18%, far exceeding its average annual return of 7%.

Browne’s investing philosophy was that when times are good, stocks do well. Meanwhile, bad times are good for Treasury bonds, and gold does well during stagflation. Also, cash is king during a recession or crisis.

Since we don’t know what the future holds, Browne advocated for putting 25% of your portfolio into each asset class. He also suggests being prepared for whatever comes. With bonds, gold, and Treasury’s in your portfolio, you’ll underperform during a bull market. However, you can more than make up for it by softening the blow during a down market.

The “Cockroach” Portfolio

Back in 2012, Dylan Grice, a former strategist with SG Securities, called that type “the cockroach” portfolio. He dubbed it as such due to its ability to survive anything thrown at it.

“What I like best about cockroaches,” wrote Grice, “isn’t just their physical hardiness, it’s the simple algorithm they use to survive. According to Richard Bookstaber, that algorithm is ‘singularly simple and seemingly suboptimal: it moves in the opposite direction of gusts of wind that might signal an approaching predator.’ And that’s it. Simple, suboptimal, but spectacularly robust.”

Grice has calculated that for long-term investors, this type of portfolio has done at least as well as the traditional 60/40 stock and bond mix since the early 1970s. But most importantly, it managed to avoid any massive drawdowns.

And just like cockroaches, your first job is surviving as an investor, says Groce, while prospering is job number two.

A Similar Approach

Fortunately for investors who are looking for this type of portfolio, an ETF has recently launched that follows the same approach as the “cockroach” portfolio.

It’s called The Advanced Research Investment Solutions Risk Parity ETF (RPAR) and was launched last November. Alex Shahidi, the managing partner and co-chief investment officer, says they’re up to $620 million in assets so far.

He says the ETF has returned 12% so far this year compared to 1% for the S&P 500.

Most importantly, during the crash in March it fell just 15%, less than half of the drop in the S&P 500.

According to Shahidi, the fund is 25% stocks, 15% industrial commodities, 17.5% gold, 20% long-dated Treasury inflation-protected securities and 42% long-term Treasury bonds. Total exposure to the market is 120%, because the fund is 20% leveraged.

The stock mix is half U.S. and half overseas stocks, with the overseas portion tilted toward high volatility emerging markets.

Nobody knows what the market will do next, so Shahidi says you want to be prepared for any outcome. “You want to be diversified to (different) economic environments,” he added.

He did say that “If I had to pick an asset class for the next 10 years, it would be gold.”

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How To Buy Gold For Your Investment Portfolio – Part 2

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How To Buy Gold For Your Investment Portfolio - Part 2

Yesterday was part one of buying gold and silver coins for your investment portfolio. With gold and silver both on a hot streak, investors are looking for the fastest way to gain exposure to and buy precious metals. You must be prudent and exercise caution so you don’t make a mistake and find yourself with a bad investment.

Do: Buy Gold With Your Savings

Don’t borrow money to buy gold. Use your savings so when you take possession of your gold, it’s yours without any claims against it. With volatile gold prices, you don’t want to be paying back a loan on your gold if the price suddenly dips.

Don’t: Buy Gold With Credit

The current financial system is built on fiat currency and debt with dollars being printed out of thin air. The reason to own gold is the opposite of that. So to purchase gold by using the system it is protecting against defeats the purpose of owning gold. Just use your savings and own your gold outright from day one.

Do: Store Coin Nearby

If a crisis hits and you need access to your gold, you don’t want to be out in public trying to retrieve your gold. So whether it’s in a small safe hidden in your house or buried in your yard, keep your gold nearby for easy access.

Don’t: Store Coins In a Safety Deposit Box

Storing your gold at a bank sounds like a safe decision. But it’s a bad idea for a few reasons. The first is that if there were ever a crisis, you have to go to the bank to retrieve your gold. That assumes the banks will be open during a crisis. Then you have to get access to your safety deposit box, retrieve your coins and safely get them home. That’s a lot of things that need to go right during a crisis. Additionally, gold has been confiscated before. Here in the US, gold was confiscated in 1933 under Franklin Roosevelt. If it were to happen again, gold stored at home, where there is no record if it, is much safer.

Do: Only Invest With Money You Don’t Need For Awhile

Nobody knows when inflation will hit, or the dollar will collapse, or when gold prices will finally take off. But we aren’t trying to time any of those occurrences. The reason to own gold is a long term store of value. So you don’t want to speculate in gold. We could see prices move higher or significantly lower. But long term, history has shown that gold prices steadily march higher as the dollar steadily declines in value. So when buying gold, make sure it’s with money that you don’t need in an emergency. We suggest using savings or other funds that you don’t need to worry about getting access to for at least five years.

If you have any more questions about investing in gold, find a reputable gold coin dealer near you. They will be glad to answer questions.

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