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This post was edited by abramicus at 2015-11-14 12:48|
The carrot dangled by the IMF in front of China, of inducing China to overvalue the yuan for the past five years, has served its purpose well. It had slowed down China's growth and turned its enormous foreign currency reserves against itrs own economy, by using it to buy up Yuans, in order to make the Yuan appear unshakably pegged to the US dollar, to give the rest of the world the impression that the Yuan is indeed as stable as the US dollar, and a bit better even, as the Yuan had steadily appreciated against the US dollar year after year by 1-2% at the least, further bolstered by the interest rate of Chinese banks being higher than the interest rate in America, Europe or Japan. All based on the mirage of an infinite amount of China's forex reserves, which have finally taken a big hit this year, of more than half a trillion dollars, masked by the greater amount of forfeited export earnings, and the even greater amount of reduced production by its manufacturing sector, and finally topped by the even greater amount of foreign currency denominated debt that Chinese businesses, banks, factories and even local governments had been encouraged to borrow, in order to boost what is called "capital account surplus" which in layman's term is what China owes the rest of the world in foreign currencies.
Now, the public execution of the Chinese economy is about to unfold.
When Yellen raises the Fed rate, the axe will fall on the neck of the Chinese economy, heretofore sore from being strangled for so long by the noose of its overvalued Yuan exchange rate. Now, the real economy will collapse, factories will close, workers will be laid off, and banks will go belly up. What a sad ending to such a great economic miracle, started by Deng. Yes, China will be given its carrot. The IMF will allow the Yuan to become one of its reserve currencies, which account for no more than 2% of the total reserve currenceis held by banks around the world. And it would not save China's economy from total destruction.