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This post was edited by abramicus at 2015-7-10 12:40|
bushier Post time: 2015-7-9 22:46
The exchange rate of USD to yuan is decided by the Chinese government. If Chinese government sel ...
You said, "If Chinese government sell US dollars (in the US treasury bond), and buy yuan from the Chinese at fixed exchange rate, China can not devalue the yuan."
Reply: This is not true. The opposite conclusion is in fact true. If the Chinese government sells the Dollars and also buys the Yuans, then it sets both the bid for the Yuan and the ask for the USD, and at the same time, being the issuer of the Yuan, it sets the ask for the Yuan and the bid for the USD, and thus can completely determine whatever the Dollar value of Yuan it wants, including a 6.50 Yuan/Dollar exchange rate. Unfortunately, the Chinese government has chosen the value of 6.20 Yuan/Dollar that continues to strangle its manufacturing sector, making its products overpriced in dollars abroad and in yuans within China, resulting in thinner profit margins, and in many cases, in net losses, forcing the factories to reduce wages, reduce hours of work of its workers, and reduce the number of jobs. This in turn causes the workers to reduce their purchases of new homes, as they have less savings to make the down payments or the cash payments for homes. This then causes the home prices to stagnate or to fall. This then causes investors to avoid investing in real estate, and put their money in the riskier stock market. Or, they lend their money to so-called "trust companies" that promise them a higher interest rate than the banks, which then loan the money to the public to speculate in stocks on margin. This then resulted in ever rising stock prices, purchased with 90% borrowed money, which allows the buyer to hold on to his shares only if the price keeps going up. Once the price drops because there are fewer and fewer buyers due to fewer and fewer workers who are employed, the loans in the margin accounts become due, forcing the sale of the shares, leading to a vicious cycle of falling share prices. This is in short what happened in the stock market.
The source of the catastrophe was the dogged determination of the Chinese government to keep the Yuan at an unsustainable overvalued exchange rate of 6.20 Yuan/Dollar, which will be sustained only as long as China's foreign currency reserve exceeds it aggregate national liabilities in foreign-currency-denomiinated loans, which has exploded from a few hundred billion dollars to possibly two trillion dollars in the past 2 years, wiping out more than half of China's equity in its foreign currency reserves. With the wipe out of private capital due to the stock market crash, and capital flight, China's true equity in its foreign currency reserves could very well be less than one trillion dollars today. So, the overvalued Yuan exchange rate of 6.20 Yuan/Dollar is not sustainable either.