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China's currency the Yuan, also called the Renminbi (RMB),
hit a historical low of 6.04 against one dollar last month.
However, the Yuan suddenly started to fall when people
expected the exchange rate to drop below 6.
Just in ten business days, the Yuan has fallen fell by more
than 2% to 6.165093 against one US dollar, noting that China's
currency only rose by 2.9% during the whole year of 2013.
Is the Yuan still a safe currency for investment after
such a huge slump?
Let's look at the following report.
On Feb 27, the Wall Street Journal (WSJ) commented on
the recent plunge of China's Yuan.
The WSJ quoted a resource that it was China's Central Bank
that "engineered the recent decline" in its currency,
such as to "thwart short-term speculators".
WSJ also said, that the Chinese Communist Party (CCP)
"intervened in the currency market by directing state-owned
Chinese banks to buy US dollars", according to traders.
WSJ's report is not groundless at all.
On Feb 16, the CCP's Central Bank held a two-day meeting
over its currency, Yuan business.
The Central Bank announced after the meeting that, it had
decided to beat expectations of unilateral appreciation
in Yuan, such as to suppress speculations.
On the 19th, the second day after the meeting, the Yuan
started the current round of plunging.
Hong Kong media reported that, in morning trades on the 19th,
at least two big Chinese banks bought US dollars, consequently
resulting in a sudden rise in the dollar.
Ren Zhongdao, Chinese Financial Analyst: The party is
always controlling the exchange rate.
Its Central Bank provides a reference value to prevent daily
decline from exceeding 1%.
But indeed the CCP have complete control
over the exchange rate.
It can make it rise or fall whenever it wants.
The truth is, as early as in 2012, the CCP's Central Bank
had intentionally depreciated the Yuan by about 1.5%.
On the other hand, latest statistics by the CCP's Foreign
Exchange Administration show that, the total settlement
in exchange by Chinese banks reached 1.2412 trillion
Yuan ($US 203.3 billion) in January 2014.
During the same period, the total sale in exchanging currency
is 793.7 billion Yuan ($US 130 billion).
The balance is 447.5 billion Yuan ($US 73.3 billion),
1.3 times that of last month.
Those facts clearly indicate that hot money continued to flow
into China in January.
A non-profit research institution, Global Financial Integrity
reported that nearly 100 billion dollars flew into China
in forms of forged export invoices during 2013.
That money was mostly used in fields such as high-interest
loans and real estate investment.
Xie Tian, Professor at University of South Carolina,
commented that the level of price rises in China's real estate
market is far more than that in exchange rate drop.
During 2013, China's average house price increased by 9.5%.
Therefore as long as China's real estate bubble does not
burst, there is still space for hot money to make a profit.
Xie Tian, Professor at Aiken Business School, University
of South Carolina:" In fact we know that a large fraction
of that hot money is from the CCP itself.
The party bigwigs circulate their money bank to China."
Xie Tian said, China's housing bubble will definitely burst
in a long-term view.
Once that occurs, a consequent huge slump in
the Yuan is unavoidable.
WSJ's report also mentions that, the CCP is currently
planning for financial reform.
The goal is to elevate the Yuan to "rival the U.S. dollar for
supremacy on the world stage".
The exchange-rate reform is part of that plan.
The report quoted sources familiar to the CCP's Central Bank
that the People's Bank of China (PBOC) is "testing the market
as it prepares to widen the Yuan's trading band".
Analysts expect that the PBOC will allow its currency to
move up or down by 2% daily this year.
Currently, the PBOC only allows the Yuan's value to move
by 1% in either direction from its average price
in daily trading.
Xie Tian: As long as the CCP still governs China, it probably
will never allow the currency to move freely.
Similarly, they will never return land and state-owned
properties to the Chinese people.
Xie Tian commented that the CCP took power with lies
and violence back in history and now tries to maintain
its regime with the same means.
Therefore, it can hardly keep its governance once losing
control over the financial market, currency and land trade.
On the other hand, there are different opinions
on the big drop in Yuan.
The New York-based Goldman Sachs Group released
a report on Feb 21.
The report said, "Ghost towns, local debts and trust
sector crisis" caused the slump in Yuan.