{"id":3275,"date":"2015-08-20T16:09:03","date_gmt":"2015-08-20T20:09:03","guid":{"rendered":"http:\/\/blog.silver-investor.com\/?p=3275"},"modified":"2018-06-10T10:54:50","modified_gmt":"2018-06-10T10:54:50","slug":"rmb-devaluation-chinese-foreign-reserve-and-gold-price","status":"publish","type":"post","link":"https:\/\/www.themorganreport.com\/blog\/rmb-devaluation-chinese-foreign-reserve-and-gold-price\/","title":{"rendered":"RMB Devaluation, Chinese Foreign Reserve and Gold Price"},"content":{"rendered":"

 
\nRMB Devaluation, Chinese Foreign Reserve and Gold Price
\nAugust 19, 2015
\nOn May 29, 2015, The Wall Street Journal reported:
\n\u201cOn May 22, 2015, Yi Gang, the Vice-Governor of the People’s Bank of China (the \u201cPBoC\u201d) said at a forum in Beijing that \u201cIt\u2019s not necessary\u201d to bolster growth by devaluing the yuan. Mr. Yi pointed to China\u2019s trade surplus, which has narrowed in recent years but remains relatively large, indicating Chinese exports are still strong.\u201d
\nOn August 12, 2015, Yahoo news reported:
\n\u201cChina cut the yuan’s value against the dollar for the second consecutive day Wednesday, roiling global financial markets and driving expectations the currency could be set for further falls.
\nThe daily reference rate that sets the value of the Chinese currency against the greenback was cut by 1.62 percent to 6.3306 yuan, from 6.2298 on Tuesday, the People’s Bank of China (PBoC) said in a statement on its website.
\nThe move took the reductions to 3.5 percent this week — the largest in more than two decades — after a surprise cut on Tuesday, but the central bank played down expectations it would continue to depreciate the currency.
\nThe combined drop is the biggest since China set up its modern foreign exchange system in 1994\u201d , when it devalued the yuan by 33% at a stroke.
\nThis sudden change of course is not typical of Chinese central planners. What happened in the three months that led up to such a dramatic about-face?
\n1.\tSlump in exports?
\nOn August 8, 2015, Reuters reported:
\n\u201cChinese exports tumbled 8.3 percent in July, their biggest drop in four months and far worse than expected, reinforcing expectations that Beijing will be forced to roll out more stimulus to support the world’s second-largest economy.\u201d
\n

US$ hundred million<\/figcaption><\/figure>\nLooking at the table data, the 8.3% drop referenced above compared Chinese exports in July 2015 to those in July 2014. Chinese exports in 2015 had in fact, been steadily increasing. Thus, the amount of actual Chinese exports is unlikely to be the cause for the sudden RMB devaluation.
\n2.\tDeteriorating Current Account?
\nThe current account is an important indicator of a country\u2019s economic health. It is defined as the sum of the balance of trade (goods and services exports minus imports), net income from abroad, and net current transfers. A positive current account balance indicates that the nation is a net lender to the rest of the world.
\n
US$ hundred million<\/figcaption><\/figure>\nChina continues to show a positive current account balance. In fact, 2015 numbers are better than those of 2014. Thus, current account level is unlikely to be the cause for the sudden RMB devaluation.
\n3.\tSlowdown in Foreign Direct Investment?
\n
US$ hundred million<\/figcaption><\/figure>\nWhile foreign direct investment in 2015 has been a shadow of those in 2014, it has been steadily increasing. Therefore, it should not be a major cause of concern.
\n4.\tSlow Down in GDP?
\n
US$ billion<\/figcaption><\/figure>\nChina\u2019s GDP growth continues to be on a positive trajectory, with 2015 GDP growth expected to be 5 – 7%. In absolute terms, 5% of US$10 trillion in 2015, is the same as 10% of US$5 trillion in 2010.
\n5.\tSway IMF to include RMB in Reserve Currency?
\nOn August 4, 2015, Bloomberg reported:
\n\u201cThe International Monetary Fund said the yuan trails its global counterparts in major benchmarks and that \u2019significant work\u2019 in analyzing data is needed before deciding whether to grant the Chinese currency reserve status.
\nIMF staff members also opened the door to a possible delay in any approval with a proposal to postpone by nine months, until September 2016, the implementation of a change in the basket of currencies that make up the lender\u2019s Special Drawing Rights\u2026
\nChina has been pushing for the yuan to join the dollar, euro, yen and pound in the SDR basket; while France has called for including the yuan, the U.S. has urged China to keep moving toward a flexible exchange rate and making financial reforms to qualify.\u201d
\nInclusion of RMB in the reserve currency basket will create demand for the RMB, as desired by the Chinese government. If the motive for the devaluation of the RMB was to appease the IMF, such a token action could hardly get the job done.
\nOn August 19, 2015, The Wall Street Journal reported:
\n\u201cthe yuan doesn\u2019t meet the IMF\u2019s key criterion that reserve currencies must be \u2018freely usable,\u2019 meaning countries could face problems trying to buy and sell the yuan in a pinch\u201d
\nSo the question is: At what level will the RMB trade if China were to leave the RMB to its own devices?
\n6.\tHemorrhaging China Foreign Reserve and Capital Outflow?
\n
US$ hundred million<\/figcaption><\/figure>\nChina has sustained the largest capital outflow on record in 2015. However, US$1 billion per quarter as indicated above is nominal. The real alarming sign is the rapid decline in China\u2019s foreign reserve, which is down over US$400 billion in the first half of 2015.
\n
US$ million<\/figcaption><\/figure>\nDespite a 25% increase in GDP since 2012 and a continued current account surplus throughout, the Chinese foreign reserve has stayed at the 2012 level. With a positive current account, where did the US$400 billion go? Could there possibly be a run on the currency? I suspect only an inner circle of Chinese bureaucrats know the answer.
\n
Yuan to US$<\/figcaption><\/figure>\nSince 2006, investors and speculators have made only one-way bets on the RMB, with guaranteed results as it seemed, until now.
\nJust the offshore RMB deposits held in Singapore, Taiwan and Hong Kong alone amount to over 1.3 trillion RMB valued at US$200 billion. How much pent-up demand exists today to repatriate money out of China from foreign speculators, funds, investors and foreign companies? Maybe the Chinese government will no longer be able to keep the flood off the gates?
\n
\n
\nChina and India are two of the world\u2019s largest gold consumers. Naturally, gold prices should have gone down when the RMB was devalued, given the reduced Chinese purchasing power for gold. Quite to the contrary however, gold prices went up during five straight trading days following the RMB devaluation.
\nThe reason? Are RMB speculators possibly moving out of RMB into gold? This could be entirely plausible as RMB investors were likely seeking an alternative to the US dollar and the euro in the first place. Commodity currencies remained unattractive given the slowdown in the world\u2019s economy. The gold market is small, with annual gold production amounting to approximately US$160 billion, and total above ground gold stocks amounting to approximately $8 trillion, in all shapes and forms. Even the slightest increase in physical demand for gold can have a profound impact on the price of gold.
\nNow that the cat is out of the bag, the run on RMB might intensify, which could force or speed up action by the PBoC to decisively devaluate RMB to approximately free market trading levels to lessen the reserve bleeding, with the added benefit of reviving export and foreign direct investment.
\nWhat is the free market RMB to US dollar exchange rate? Having visited and stayed in China on a monthly basis, I can say it\u2019s not cheap to live in China where a bottle of beer can cost you US$10 and a modest 1,000-square-foot flat can easily set you back a cool US$2 million in Beijing. China set up its modern foreign exchange system in 1994, when it devalued the yuan by 33% at a stroke. We may just see that for the second time very soon.
\nInstead of focusing on the Federal Open Market Committee\u2019s sideshow regarding the US interest rate, gold investors should monitor the Chinese foreign reserve for investment clues. I like gold\u2019s risk-reward profile at $1,120. I own physical gold and silver and manage a company engaged in silver exploration.
\nJohn Lee, CFA
\nExecutive Chairman, Prophecy Development Corp.
\nwww.prophecydev.com<\/a>
\njlee@prophecydev.com<\/a><\/p>\n

Author\u2019s Biography:
\nJohn Lee, CFA
\nExecutive Chairman, Prophecy Development Corp.
\nwww.prophecydev.com<\/a>
\nJohn Lee is an entrepreneur with degrees in economics and engineering from Rice University. Under John\u2019s leadership, Prophecy raised over $100 million and acquired substantial silver mining projects in Bolivia and coal mining projects in Mongolia.
\n <\/p>\n

David Morgan is a precious metals aficionado armed with degrees in finance and economics as well as engineering, he created the Silver-Investor.com website and originated The Morgan Report, a monthly that covers economic news, overall financial health of the global economy, currency problems, and the key reasons for investing in precious metals.
\nAs publisher of The Morgan Report, he has appeared on CNBC, Fox Business, and BNN in Canada. He has been interviewed by The Wall Street Journal, Futures Magazine, The Gold Report and numerous other publications. If there is only one thing to teach you about this silver bull market it is this… 90% of the move comes in the last 10% of the time!<\/strong> Where will you be when this happens?<\/p><\/blockquote>\n

 
\n

Join The Morgan Report Free for 30 Days *<\/strong><\/span><\/a>* 30 Day Trial applies to new user sign ups only!
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<\/center>   <\/p>\n","protected":false},"excerpt":{"rendered":"

  RMB Devaluation, Chinese Foreign Reserve and Gold Price August 19, 2015 On May 29, 2015, The Wall Street Journal reported: \u201cOn May 22, 2015, Yi Gang, the Vice-Governor of the People’s Bank of China (the \u201cPBoC\u201d) said at a forum in Beijing that \u201cIt\u2019s not necessary\u201d to bolster growth by devaluing the yuan. Mr.More<\/a><\/span><\/p>\n","protected":false},"author":2,"featured_media":0,"comment_status":"closed","ping_status":"closed","sticky":false,"template":"","format":"standard","meta":{"footnotes":""},"categories":[121,89],"tags":[],"yoast_head":"\nRMB Devaluation, Chinese Foreign Reserve and Gold Price<\/title>\n<meta name=\"description\" content=\"RMB Devaluation, Chinese Foreign Reserve and Gold Price\" \/>\n<meta name=\"robots\" content=\"index, follow, max-snippet:-1, max-image-preview:large, max-video-preview:-1\" \/>\n<link rel=\"canonical\" href=\"https:\/\/www.themorganreport.com\/blog\/rmb-devaluation-chinese-foreign-reserve-and-gold-price\/\" \/>\n<meta property=\"og:locale\" content=\"en_US\" \/>\n<meta property=\"og:type\" content=\"article\" \/>\n<meta property=\"og:title\" content=\"RMB Devaluation, Chinese Foreign Reserve and Gold Price\" \/>\n<meta property=\"og:description\" content=\"RMB Devaluation, Chinese Foreign Reserve and Gold Price\" \/>\n<meta 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