China Makes Play to Replace Dollar With Yuan As Reserve Currency

China offers to world AIIB, BRICs bank, Silk Road, 1 Belt 1Road, RCEP, FTAAP. US had only TPP to balance that. Now gone with Trump #WEF17

— Nouriel Roubini (@Nouriel) January 17, 2017

Xi is making a skilful pitch at Davos #WEF17 to make China the champion of free trade and globalisation, and to replace the Dollar with the Yuan as the global reserve currency.

China Says "Ha" To Soros

George Soros in China’s crosshairs after predicting tough economic times ahead https://t.co/nSXFpP7Et7 pic.twitter.com/Q37KKpsaNc

— Wall Street Journal (@WSJ) January 27, 2016

Britain Backs China

BRITAIN BACKS RMB’S INCLUSION INTO SDR BASKET: XINHUA. So only the US opposes

— zerohedge (@zerohedge) October 22, 2015

The Currency Wars Begin

Whilst the ongoing Greek farce has provided a massive distraction for the media and those who take an interest in financial matters, China's 2% devaluation of the Yuan this week has caught everyone's attention.

For why?

It heralds that start of currency wars, as countries rush to devalue in order to maintain the menisci of their respective financial bubbles.

Speculators Get Fingers Burned in China

Speculators have been borrowing dollars to buy Chinese assets (aka the "carry trade"). They are gambling that the yuan will strengthen. However, the gamble has not paid off because (as per the Telegraph) the yuan has fallen 2.5% against the dollar since January.

The situation will be exacerbated as the US Federal Reserve brings forward plans to raise interest rates. 

China Loosens Currency Controls

The People's Bank of China (PBOC) has announced that it is loosening currency controls over the Yuan. As from today, the Yuan can fluctuate up to 1% (the previous limit being 0.5%) in trading against the US dollar from a fixed price set by the central bank.

The move will please the USA, which has been banging on about the Yuan being "undervalued" for years. Ironically, the Yuan finished weaker against the Dollar at the end of today's trading.

Here is the full text:

"The People’s Bank of China Announcement [2012 No.4] 

Along with the development of China’s foreign exchange market, the pricing and risk management capabilities of market participants are gradually strengthening. In order to meet market demands, promote price discovery, enhance the flexibility of RMB exchange rate in both directions, further improve the managed floating RMB exchange rate regime based on market supply and demand with reference to a basket of currencies, the People’s Bank of China has decided to enlarge the floating band of RMB’s trading prices against the US dollar and is hereby making a public announcement as follows:


Effective from April 16, 2012 onwards, the floating band of RMB’s trading prices against the US dollar in the inter-bank spot foreign exchange market is enlarged from 0.5 percent to 1 percent, i.e., on each business day, the trading prices of the RMB against the US dollar in the inter-bank spot foreign exchange market will fluctuate within a band of ±1 percent around the central parity released on the same day by the China Foreign Exchange Trade System. 

The spread between the RMB/USD selling and buying prices offered by the foreign exchange-designated banks to their customers shall not exceed 2 percent of the central parity, instead of 1 percent, while other provisions in the Circular of the PBC on Relevant Issues Managing the Trading Prices in the Inter-bank Foreign Exchange Market and Quoted Exchange Rates of Exchange-Designated Banks(PBC Document No.[2010]325) remain valid.

In view of the domestic and international economic and financial conditions, the People’s Bank of China will continue to fulfill its mandates in relation to the RMB exchange rate, keeping RMB exchange rate basically stable at an adaptive and equilibrium level based on market supply and demand with reference to a basket of currencies to preserve stability of the Chinese economy and financial markets."

The fact that it is a rarity that the PBOC issues statements in English demonstrates that this move is targeted at foreign markets.

China Gives Markets a Boost

China's announcement that it is to end its two year peg of the Yuan against the Dollar, and effectively to allow a managed rise in the value of the Yuan, has given world stock markets a much needed boost.

Any rise in the Yuan will be gradual, as the Chinese will manage its rise carefully. However, markets have taken the announcement as a sign that China is confident about its economy.