Internationalization of the Yuan

How does China’s plan for internationalization of the Yuan affect Forex traders? China would like the Yuan to be used as an international currency. However, foreign buyers typically pay with their own currencies while foreign suppliers typically are happy to receive Yuan. The Chinese currency has steadily risen against the dollar. The problem for China is that it is increasing its foreign currency reserves at a time when the dollar and Euro are going down in value versus the Yuan. China is losing money on their foreign currency reserves! To a degree the Chinese are at fault for causing this problem. They, like the Japanese and Taiwanese before them, have manipulated their currency, by purchasing dollars, in order to keep their currency weak and the dollar strong. This strategy profits an export driven economy. By keeping the Yuan exchange rate artificially low China has risen to be a global exporter and accumulated massive foreign currency reserves.

Nigeria, a major oil producer and supplier of petroleum to China has just announced that it will begin to add the Yuan to its currency reserves targeting a five percent to ten percent level. This will certainly benefit Nigeria if the Yuan continues to rise in value versus the dollar or Euro. The decision may also be more complicated as China seeks the internationalization of the Yuan. If nations are holding ten percent of their reserves as Yuan and ninety percent as dollars likely not affect the dollar. However, if China discontinues its policy of supporting the dollar at the expense of the Yuan its export situation could suffer. The issue for the trader is how to trade Forex in the event of successful internationalization of the Yuan. Right now the Yuan is really not a market driven currency.

China came out of its self-imposed cocoon years ago and came upon the global economic stage. Its huge, cheap, labor pool was attractive to those who set up factories in China to import back to the world. The huge potential customer base in China was an even bigger attraction to many who were willing to invest and wait for decades for their chance to sell products to an increasingly prosperous Chinese customer base. Now, thirty-nine years after President Nixon’s surprise visit to China opened relations between the two nations, China is looking at internationalization of the Yuan as a step toward a larger role on the world stage. Foreign currency trading of the Yuan versus the dollar may become totally market driven if China gives up its currency controls. Traders will have to follow both fundamental and technical aspects the market at that point in order to profit from trading in a post internationalization of the Yuan era. In the meantime traders are better advised to watch pronouncements of Chinese monetary officials to better anticipate target exchange rates set by the Chinese. As always we are not suggesting that traders trade the Yuan or ignore it. Rather we offer this discussion as an example the thinking traders may go through in approaching a foreign currency.