Tuesday, November 4, 2014

Buying about $8 trillion of foreign assets and companies will prevent Chinese Yuan from strengthening 5 to 1 until about 2045

According to the most recently published data, in 2011 total deposits held in these institutions by corporations, individuals and other entities amounted to 80.9 trillion yuan ($13.3 trillion)—70% more than China's GDP. (In the U.S. in 2014, M2—consisting of total demand deposits, savings deposits and small time deposits—was 35% less than U.S. GDP).

If and when full yuan convertibility occurs, a significant share of these yuan balances (perhaps 10% or more) will diversify into other foreign assets, especially dollar assets. Buying up foreign assets on a major scale means flooding the market with yuan, putting downward pressure on its value. And as long as China maintains an annual current account surplus—currently about $190 billion—some of it will further boost demand for foreign assets, thereby further weakening the yuan's exchange rate.

These three factors mean that the yuan's value is likely to stabilize toward the lower end of the 16 cents to 20 cents range. That said, so long as China's unusually high savings rate persists—about 40% of GDP compared with less than 10% in the U.S.—so too will large surpluses recur in its current account.

Charles Wolf of Rand Predictions Summarized

HSBC expects yuan to be a top three currency for trade settlement in 2015 and fully convertible by 2018

* Wolf expects China will buy $2 trillion initially in foreign assets (companies, properties etc...) around 2018 with full convertibility

* China will continue to have a surplus and will buy more assets $100-200 billion per year ($1-2 trillion per decade)

It will likely take about 30 years for China's savings rate to get to the 10% range

If Wolf is right then it will be about 2045 before China's yuan strengthens beyond 5 to 1 to the US dollar.123123123

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