Now a Regular Currency?

03/05/2014 12:01 am EST

Focus: GLOBAL

Jim Jubak

Founder and Editor, JubakPicks.com

The surprising move in the Chinese Yuan makes it seem more like a normal currency says MoneyShow's Jim Jubak and he wonders if it represents a change in strategy.

Suddenly, the Chinese Yuan, or the Renminbi, if you really want to twist your tongue around it, is acting more like a regular currency. We have had a move that amounts to, oh, a whole 1% down, which is the unusual thing in the Yuan over the last week or so, the week that, sort of, goes from February 25 backwards to whatever that is, February 17. A move of a % in a week is not a big deal for most currencies, but it is for currency that is as tightly controlled as the Chinese currency. It trades in a band, the People's Bank makes sure that it does not trade outside that band, it cannot move more than 1% a day. This is a big deal and people are trying to figure out why it is a big deal. What is going on here, because, as I say, this is a controlled currency, the worry that this kind of move produces is that it signals some kind of policy change at the People's Bank and that they are trying to, and this is sort of the most benign interpretation of this, they are trying to get some of the speculators out of the market by making them take some losses. Basically, you have a lot of people who thought the only direction the Yuan is going to move is upward, so you can basically put on long bets and you do not have to worry about it moving downward. The fact that you have a downward move in a very leveraged market would be important.

But the less benign, the more, “Oh we ought to worry about this” says this is a sign that the Central Bank is moving back toward tightening the money supply and that one of the major sources of money supply growth in China has been the Central Bank's need to prevent the Yuan from going up too fast. That is adding more money to the money supply. If they let the Yuan go down that would eliminate that problem as well as the possibility that what we are really looking at here is an indicator of a shift in policy toward a tighter market. The second shoe, if you will, that people drop, or a certain data point we add to this trend, is that the Central Bank took about $16 billion or $17 billion out of liquidity in the week in the middle of February. The Bank has done this before. The Bank was adding liquidity around the lunar New Year holiday, which is what it typically does, so maybe all we are seeing is the Bank saying, “Oh, okay, we put money and let's now take some money out,” but people are going, “Okay, I do not see what is going on here.” I think the Bank may be deciding to tighten and the real concern is that the People's Congress is meeting in the first week in March. There probably will be an announcement about what the growth rate is going to be for a target in 2014. If it is below the 7.5% for 2013 that will give the Bank some more room to tighten further and that is what people are really nervous about, because that will mean less buying of houses, lower real estate prices, less real estate activity, and that is a major driver in the Chinese economy. That in itself would take things lower. That is the worry and that is all that we are watching the Yuan, trying to figure out what it means.

This is Jim Jubak for the Money Show.com Video Network.

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