I just had epiphany. I have been assuming that the Chinese would not destroy their own currency in order to save the US, but maybe that is wrong. Maybe they already have.
China keeps its dollar peg by printing yuans and then using them to buy dollars. As you can imagine, this yuan printing has been greatly increasing their money supply in recent years, resulting in 10% inflation. In order to fight this inflation, China had been allowing the yuan to strengthen.
Now in the middle of last year, China stop allowing its currency to rise. At the same time, its trade surplus has continued to grow. In order to keep the yuan stable with a growing trade surplus, China must have been printing trillions of yuan.
This would also explain why China's Treasury Holdings Rising Exponentially:
If China was experiencing 10% inflation before, and it has now greatly increased the speed of its money printing, shouldn't it be experiencing over 20% inflation right now? Not if Chinese banks are hording cash the same way US banks are.
If all the above is the case, hyperinflation could start in China, and then China would export it all over the world.
This Chinese hyperinflation could be what forces China to drop its dollar peg as it desperately sells ALL its dollar reserves to save its currency.
Also, if China sells its reserves, everyone else will too.
Finally, the yuan is still going to rise against the dollar, so any yuan inflation will be multiplied by the dollar's depreciation as China sells its reserves.
I am tired, so I will get started on researching this more tomorrow. In meanwhile, if anyone wants to help, here is info I need:
How leveraged was/is the Chinese financial system compared to US? (How bad a threat is debt deflation in China?)
What are the money supply figures for China (M0, M1, M2, etc)? (I want to compare China's money supply to the growth of its reserves)
What is the velocity of money right now in China? Are banks hoarding cash there too like in the US?
Friday Oct 10 I mentioned a new Asia Bond in my blog here:
http://dashxdr.blogspot.com/2008/10/new-asia-bond.html
Suppose China issues this new bond, and there is a period where US Treasuries can be exchanged for the bonds. Almost like the US Treasuries are "gold".
Then the US goes into massive printing of US Treasuries to finance operations. The world wants no part of this, but they also want to preserve the _information_ about who held what amount of US Treasuries. The Treasuries themselves are worthless, but the information on relative wealth is valuable.
So China stops exchanging their new bonds for the US Treasuries, and the measure of wealth is how many of the new bonds an entity held.
Prior to the Treasury collapse, hoarding US Treasuries would be a good idea, because they represent the backing of the new Asia Bond. Maybe that's why China is buying up US Treasuries.
Just a thought...
I could be wrong about this, but I don't think china sells it's yuan to buy dollars at all. If it sells anything to buy dollars it's normally goods and services or possibly other currencies such as the euro. The yuan is not fully convertible and I don't think foreigners are generally allowed to hold large amounts of yuan at all.
China's currency is non-convertible - you can only buy yuan for specific purposes that need approval on a case by case basis. Once approved, they will offer to give you X amount of yuan for your dollars. Since there are way more people wanting to buy yuan than are able to get approval to buy them the chinese central bank's official conversion rate will always be better than what's available on the black (free) market.
If they want to lower the official value of the yuan then they can do so, but you still need approval to buy yuan at that price. They are not selling trillions of yuan in order to suppress the price generally.. they're just lowering the price for a (relatively) small number of approved transactions.
"I don't think china sells it's yuan to buy dollars at all."
Here is a quote from the article I just posted:
"For those of us in the money camp, inflation was the all-too-expected reaction to explosive money creation caused by China’s currency regime, in which the country’s central bank purchased a torrent of inflowing dollars in order to maintain the value of the currency. In order to fund the purchase of all these dollars, it created RMB, which was intermediated by the formal and informal banking systems into rapid credit growth."
"If they want to lower the official value of the yuan then they can do so, but you still need approval to buy yuan at that price. They are not selling trillions of yuan in order to suppress the price generally.. they're just lowering the price for a (relatively) small number of approved transactions."
China is accumulating massive holdings of US debt. Where is it getting the money to pay for all these dollar reserves? Answer: it is printing yuan.
It's not entirely clear to me what he means in that article.. but I interpret that as meaning the chinese central bank has to buy up dollars resulting from export sales (which they do, because they always have the best exchange rate for dollars -> rmb).
I suppose they do 'print' the RMB which they then give to their exporters in exchange for their dollars - but this is a rather different thing than printing RMB for pure currency speculation/manipulation.
I suppose the chinese exporters export SO MUCH stuff and the US prints so many dollars that this does sortof filter through to some extent - but I still think it's wrong to suggest that the chinese are printing RMB purely to swap for US dollars.
The main reason Yuan stop rising in the middle of last year is that dollar started to rally at the time. Against all other major currencies, Yuan still went up. Dollar rally was so strong that China even allowed Yuan to depreciated to daily limit (0.5%) 3 days in a row at the beginning of December.
Wang, you are right about why the yuan stopped falling in the middle of the year. Hedge fund redemptions forced the selling of foreign assets, causing the dollar to rally. However, in the last few months of the year these dollar inflows were drying up, and the Chinese trade surplus exploded. For example, the yuan should have rallied with November with China's 40 billion dollar surplus. However, the yuan didn't rally and Chinese reserves shot upwards. This can only mean China was buying large amounts of dollars with printed yuan.