China's Yuan Is Getting Stronger
Banks, Long-Term Horizon
Seeking Alpha Analyst Since 2008
John M. Mason writes on current monetary and financial events. He is the founder and CEO of New Finance, LLC. Dr. Mason has been President and CEO of two publicly traded financial institutions and the executive vice president and CFO of a third. He has also served as a special assistant to the secretary of the Department of Housing and Urban Development in Washington, D. C. and as a senior economist within the Federal Reserve System. He formerly was on the faculty of the Finance Department, Wharton School, the University of Pennsylvania and was a professor at Penn State University and taught in both the Management Division and the Engineering Division. Dr. Mason has served on the boards of venture capital funds and other private equity funds. He has worked with young entrepreneurs, especially within the urban environment, starting or running companies primarily connected with Information Technology.
Summary
- The Chinese government is overseeing a return to strength of the Yuan as it has risen steadily in value relative to the dollar since late May 2020.
- It could be that the Chinese leaders sense some weakness in the U.S. position due to weaker dollar and the dilemma in which U.S. economic policymakers find themselves.
- Furthermore, the Chinese seem to be far ahead of the world in terms of digital financial applications and with cryptocurrency (e-Yuan) to be in place by the 2022 Winter Olympics.
- Chinese leaders have always aspired to be a leader in the financial affairs of the world including possessing a reserve currency used by many central banks around the world.
- These Chinese leaders may feel that now is the time.
China plays for the longer-run. It is very focused, while keeping its longer-term goals in mind.
China has always wanted to have one of the strongest reserve currencies in the world.
Is now the time that China is making its move.
Stell Yifan Xie writes in the Wall Street Journal that the increasing strength of the Chinese Yuan “could…boost the global status of its currency….”[]\
For much of time Donald Trump was president, The U.S. and China were battling over tariffs and exports and such. Since early in 2018, the Chinese oversaw a weakening of the Yuan, so much so that the Trump administration criticized China for promoting a weak currency.
The fight between the U.S. and China was in trade and the weak Yuan supported Chinese exports against a combative stance taken by the U.S.
Now, it looks as if the Chinese might be pushing for something else. The Chinese may be smelling that the United States
A Stronger Yuan
Since the end of May 2020, the Yuan has become stronger against the U.S. dollar.
On May 27, 2020, it took 7.1693 Yuan to purchase one dollar.
At noon on February 24, 2021, it only took 1.4752 to acquire a dollar.
The decline has been steady and calm. One cannot see the path of the movement and not assume that the rise in the value of the Yuan has been under strict guidance by Chinese officials.
The Weaker Dollar
All during this time the value of the U.S. dollar has been in decline. I have been following this fall in the value of the dollar, both in this article and in this article.
My argument for the weaker dollar has been the extremely loose Federal Reserve monetary policy, one that accelerated through 2020 as the central bank worked to minimize the economic contraction that resulted from the Covid-19 pandemic.
As I have described the situation, never has the U.S. economy contained as much liquidity as it now does. Excess reserves in the commercial banking system total more than $3.2 trillion. Before the Great Recession in the fall of 2009, the total Federal Reserve balance sheet only amounted to about $950.0 billion.
The financial markets are flooded with money, the U.S. stock market continues to hit new historical highs, and debt issues are growing rapidly and financing vehicles like the Special Purpose Acquisition Companies (SPAC’s or blank check companies) are producing billions of “new” companies.
The on top of this the Biden administration is pushing a $1.9 trillion economic package through Congress in order to get the economy moving faster.
The result of all this pushing is that inflationary expectations have picked up in the U.S. and the value of the U.S. dollar has fallen.
For example, the U.S. dollar index (DXY) was just above 99 .00 on May 27, 2020. This noon on February 26, 2021, the index is at 90.91. On May 27, it took $1.10 to purchase one Euro; now it takes about $1.21. And, for the British pound, on May 27, it took around $1.22 to acquire a pound and now it takes more than $1.40.
Experts have even raised concerns about the role the U.S. dollar might play in the future as a reserve currency. And, this is where China comes in.
China On The Rise
Ms. Xie writes about the strength of the Chinese economy and its recent strong recovery. This is much in contrast with the concern economists have about the economic recovery in the United States.
Furthermore, Ms. Xie discussed the “massive investment flows that are coming into China from the rest of the world.
In addition, well-known financial firms are now moving into China to take advantage of what is going on there. For example, Goldman Sachs Group Inc. (NYSE: GS) has just expanded some of its efforts into the Chinese market.
Just today, we learn that the U.S.’s Vanguard Group is forming a partnership wit Ant Group Co., China’s biggest digital financial firm and an affiliate of e-commerce giant Alibaba Group Holding Ltd. “as a main route into China.”
And, speaking of digital finance, Chine is now in the process of developing “an e-Yuan that it hopes to be fully operational by the time of the 2022 Winter Olympics.”
When one talks about cryptocurrencies and payment systems, one cannot ignore talking about Alipay and WeChatPay who dominate the Chinese financial system. Note too that China is already mostly cashless and far ahead of the U.S. in this are.
James Kynge and Sun Yu write in the Financial Times,
Chinese policymakers are by far the most advanced in their thinking about a digital currency. They are thinking about things that the rest of the world is nowhere near thinking about yet.”
Gives you something to think about, doesn’t it?
Is This The Time?
The Chinese are overseeing a rise in the value of the Yuan. The U.S. is seeing a decline in the value of the U.S. dollar. The Chinese are way ahead in developing a cryptocurrency. The U.S. is stunned by the price and volatility of the Bitcoin and shies away from thinking about a digital future.
The Chinese economy is relatively strong, this year it is expecting about an 8.0 percent growth rate, while the U.S. economy is facing “radical uncertainty.” The Federal Reserve and the Biden administration will be facing some very difficult decisions over the next two years or so. Yes, they have to get the economy growing faster, but they also have historic highs in government debt and private debt. How are these institutions going to resolve the fantastic disequilibrium that exists and that they played a large part in creating.
I believe that the Chinese leaders want the Yuan to get stronger, especially relative to the U.S. dollar. I believe that the Chinese leaders believe that they have the U.S. in a very weak place. Hence, the Chinese, working for the long-run, have a glimpse of possible world leadership.
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