Forex Traders - Speculating on The Presently Undervalued Chinese Yuan

The Yuan can yield tremendous profits to investors if it rises against the dollar. The article below will discuss fully about the subject.

China’s trade surplus has been a sore thumb with the American government over the past few years. The Americans believe that their massive trade deficit with China is fuelled by a cheap Yuan policy which the Chinese government is determined to pursue in order to keep its economy humming at break neck speeds.

In order to keep the Yuan weak, the government has been mopping up dollars at a frantic pace. This has made China the country with the most foreign reserves, now topping over $1.2trillion. This is equivalent to half it’s GDP and will easily accommodate over one year of imports- which is far higher than the acceptable four months.

The question is- can the Chinese accept a revaluation of the Yuan to more acceptable levels?

The communist government is terrified of social disorder. Its only claim to legitimacy is the fast economic growth that has lifted hundreds of millions out poverty over the past two decades especially in the last six years.

One of its primary tools of achieving fast growth is the weak Yuan policy which has created and sustained a manufacturing and export boom which in turn as lifted growth to dizzying levels.

Unfortunately for the government however, there is still discontent. There are over a 100million surplus farm hands seeking work and unemployment still exist in the cities.

Also large parts of China still remain very poor especially the hinterland.

To add to this, many farmers in the rural areas where most of them are based complain about official neglect and corruption.

China thus believes it still needs years of fast economic growth to arrest the above mentioned problems.

However, things are not as simple as they seem.

First and foremost, the weak Yuan which is tied to the dollar is causing liquidity to rise to dangerous levels within the economy. This is in turn swelling demand to horrendous levels. And deflation has now been replaced by inflation. Too high a level of inflation may bring- wait a minute- social disorder. Many analysts speculate that high inflation was perhaps the true trigger for the Tiananmen tragedy.

From high inflation perspective alone, the Yuan needs to strengthen

Anyway, the government has begun tightening credit, always preferring to use crude monetary instruments such as restricting the quantity of loans flowing to some certain sectors especially real estate and steel which are poster children of the boom.

This is working to slow down growth both only slightly.

Growth can only be moderated if the Yuan rises. And the truth is that a rise will not lead to a downturn, but at most – a very soft landing. Growth may slow to 8% which is not bad but less than the double digit figures it has been enjoying of late.

The government has since 2005 permitted the Yuan to appreciate and it has consequent gone from Y8.28/$1 TO 7.71/$1. And interestingly enough, this did not cool the economy.

This indicates that further strengthening of the currency may not in reality have a dampening effect on growth.

The question now is- to what level must the Yuan rise before it reaches its real value?

Tying it with a basket of other currencies, the value will need to rise to between 6.50 and 7Yuan to the U.S currency. Whether the government will have the stomach for it is another matter.

The economy can still grow at 8% annually.

The probability of such a rate appreciation taking place may be plausible bearing in mind that the government has allowed the currency to appreciate slowly against the dollar in particular.

For the time being, however, I foresee the currency hitting 7.40Yuan to a $1 within the year or at the least 7.50.

This portends a fat profit for any trader that decides to make a move now. It may be one of the best pickings for the year.