22 June 2010

Open up of China’s Currency Great Wall

While Malaysia is demolishing the Pudu Jail's walls, China announced that they will adopt a flexible currency exchange regime, ending more than 2 years of pegging with USD.

Before this, China have been criticized for manipulating the currency market, by keeping its Renminbi / Yuan low, in order to make Chinese products more competitive, creating a wide global trade imbalance. Specifically, U.S is pointing its finger towards China for causing US economy problems which could not be solve. However, China keeps on denying and refuse to let Yuan appreciates against USD.

Why suddenly change now?

In my opinion, I summarize it into 3 main reasons as below:

1.      G20 Summit is holding its meeting this week. Again, China would face an axe from world leaders talking about the same old issue – Renminbi. In order to avoid it, just before the meeting, China announces they will adopt a more flexible stance.

2.      Inflation was the main concern for China’s economy now due to rapid growing or expansions. Last month, China recording more than 3% inflation rate. If China do not want to raise interest rate, they must find way to cool off inflation, and one of the way is lowering down import prices by having a stronger currency.

3.      China is always on the look out for investments, from US Treasuries to Commodities; China is more active than before given its superb surplus for the past few years. Going forward, Europe’s assets may falls into their investing radar. And by having a stronger currency, China can buy more assets at cheaper price.

* Do not surprise if you saw many Chinese in Europe next few months.

1 comment:

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