In the news: China Revalues the yuan!
Yesterday morning the US stock markets experienced a dramatic surge when China announced that they would leave the dollar peg in favor of a basket peg and allow the market to determine the price of their currency.
Later in the day, trading simmered back down when everyone realized that China is still holding the reigns pretty tight. Nonetheless, a change in China’s monetary policy is a great thing right now! Let’s discuss it a little.
As anyone who keeps up with world economics knows, the Chinese yuan is a major factor in many things. China has kept the value of the yuan artificially low for a long time, which has done several things. For instance, the lower value of their currency has kept their exports competitive. (Since one dollar buys more yuan, the USD is able to buy more Chinese goods for less money, which makes their products more attractive than similar domestic products.)
China has also worked to combat a speculative run on real estate this year by raising the minimum cash reserve in their banks. (Higher reserves means less money to lend, so the banks need to raise interest rates on the money that they do have to lend. Higher interest rates keeps speculators from gobbling up loans to purchase land and property in speculative ventures.)
China will no longer pegged to the dollar and the rate will be determined by the market. The stronger Yuan means inflation will be kept in check and the Chinese government will not have to raise interest rates, which is great for more than just China. It needs to be noted that China has one of the fastest growing economies in the world, and the strength and consistency of the Yuan will translate into many areas of world economics.
How does this bode for the Iraqi Dinar?
The People’s Bank of China (PBOC) has set the rate for the Chinese Yuan for years, similar to what the CBI does for the Iraqi Dinar. A move away from a dollar peg for the Chinese Yuan and into a basket peg means they are going to allow the markets determine the price of the Yuan. I would speculate that the Chinese Yuan will move higher over the next year, and if you play on any of the forex systems you may want to keep an eye on it.
Of course, it needs to be noted that China has played games with their currency before… although the early rumor yesterday was China would loosen the strings on the rate, the Yuan never actually made it past the 5% margin the PBOC sets. Also, I wouldn’t expect it to gain more than 6% over the next year – but it’s still worth watching! I actually believe the stories that suggest the Yuan is a completely free currency now are a little off base. Although the Yuan will no longer be strictly pegged to the dollar, the PBOC will still keep it in check and this won’t be a free ride up… it will be a slow, controlled climb.
The Iraqi Dinar is not on the forex, of course… but we all would love to see it go that way. A major currency revalue for the Iraqi Dinar would open the door to move the Dinar away from the dollar peg, just like the Chinese Yuan is doing. When that happens, we would expect to see the value of it continue to rise, just as we will expect to see the Chinese Yuan do over the next year or two.
Also of importance for the Dinar is this prime example of what happens when you allow the market to control itself. We already understand that allowing the Dinar to go on the Forex or be reintroduced to the world as a tradable currency will force it to go up, but what else will happen once Iraq has full freedom (i.e. no more Chapter 7 etc)? What will happen when Iraq is allowed to manage their own credit, their own manufacturing, and their own future? Take a look at this graph that shows what happened with China’s GDP (Gross Domestic Product):
See what happened there shortly after their cultural revolution and farms (aka “business”) was privatized? BOOM! The financial minds and power of the people came together to build a stronger China, and look where they are now. The same thing will happen for Iraq – once they are truly free to build and trade and sell and live, the country of Iraq will expand, grow, and thrive – and so will the currency.
Feel free to leave comments.
- Adam Montana