Wednesday, April 20, 2016

Chinese Invade IMF - Yuan Set to Become Reserve Currency

At peak of last global financial crisis of Sub Prime fame, Chinese leadership publicly criticized  international monetary system. China chided that a  international monetary system solely dependent on US Dollar for stability, will be prone to disaster. From there started Chinese quest to invade international monetary system.

China went about being the good guy and convinced IMF executive board that Yuan meets standard of "freely usable" currency. It also observed all IMF compliance rules to get approval for entry into SDR (Special Drawing Rights) basket.

Countries can use SDR to supplement their reserve currency. IMF member countries holding SDR can draw any currency from the basket to meet balance-of-payment needs.

Presently this basket of Reserve Currencies has US Dollar, Euro.Yen and British Pound. On 01 Oct 2016 Yuan will join these privileged currencies to stake claim to Global Reserve Currency basket with weighting of 10.82%, ahead of Yen and British Pound

Are you convinced that IMF has rightly approved Yuan as Reserve Currency? 

Chinese leadership has long history of being secretive and manipulative in their demeanor. All economic activity and data are either hidden from international scrutiny or fudged.

China has always been cheating on its currency and has pegged it artificially and arbitrarily to the dollar.

Despite its dubious track record on monetary front, China could win IMF approval by opening its onshore Bond and Currency markets to foreign Central Banks. Plus it reported its reserves to IMF - Bah Big Deal!!

No one is sure these reserve reports are true or not.China recently reported its Gold reserves as 1658 metric tons after a gap of six years. This is close to last reported figure six years back. However experts believe that it should be nearly double that figure at 3000 metric tons.

Who should we believe? I am with the experts who keep a close tab at various bullion activities of the dragon nation and have nothing to gain by falsifying figures.
Why IMF ignored Time Bomb called Chinese Economy?

Chinese economy is in shambles with balloons all over. Which of these balloons will burst and when, is anyone's guess.

In my earlier post I had mentioned China as one of the three factors that can crash global markets. Other two factors mentioned in that blog were Oil and Brexit. You can again visit the post : Bears Sharpening Daggers - US Markets in Danger of Bear Grip

Very briefly we will go through present state of Chinese economy to get the full import of IMF decision :-

  • Chinese stock markets, barometer of health of any economy, have simply collapsed. Shanghai Composite Index has sunk from 52 week high of 5178 to 3042 - loss of 41% in a year. Moreover it is hurtling towards 2000 level. Remember stock markets are leading indicators to overall economy by six months.
  • China is in midst of oscillating between bubbles - it moved from real estate bubble to stock market bubble to bond bubble and presently has come back to real estate bubble. Property markets in Shanghai rose by 25% year-on-year.
  • China released its GDP figures which simply do not add up. Figures are too smooth to be believed. When they had largest annual decline in rail freight traffic ever reported, how has GDP grown?
  • China is a debt fueled economy. Moth-eaten corrupt sectors like real estate are being merrily funded.
  • Chinese banks have trillion dollars as bad loans (NPAs) and are collapsing under the burden. Recapitalizing such a huge capital is not an option with the govt. 
  • China has not even come clean on the total extent of bad loans that their banks are reeling under.
  • Since the present dispensation took over in 2012, no economic reform has been carried, except anti-corruption drive within party with the sole aim of hogging and concentrating power.
The laundry list of Chinese Machiavellian machinations goes on and on. Yet IMF would like to hand over international monetary strings to China? Beats me! 

If anyone in the audience has different take, please do comment to make us wise on this issue. Whether in agreement or not, your views on the subject will go a long way in shedding more light. So do us a favor and comment uninhibitedly. 

Glimpse of US Markets

Going to press, Dow was trading at 18041, down 11 points. It opened at 18059, made a low of 18031 and high of 18078.

I am still maintaining my stance of recommending no action in US markets till clear trend emerges. Remember we are right inside the Resistance Zone of 18000/18200 in Dow. If you missed my recommendation detailing this strategy, here is the link again.

I will be waiting for your comment!