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Strategies & Market Trends : The Epic American Credit and Bond Bubble Laboratory -- Ignore unavailable to you. Want to Upgrade?

To: GST who wrote (48245)	12/27/2005 5:31:06 PM
From: bond_bubble	Read Replies (2) \| Respond to of 110194

China also has fiat currency system - basically printing to the fullest capacity - and for this reason, yuan should be valued no better than USD. At this time, the interest rate in China is below the US interest rate. For that reason it should tank if RMB is unpegged today. The exchange rate is determined by total supply and demand for yuan/USD. If china gets into trade deficit, because export market is down and China wants to continue with the investment related job creation, then China has increased demand for USD (because raw material exporters will accept USD but not yuan). It can meet this demand by devaluing or by selling the reserves it has (i.e passing the hot potato). If the export market (US) is not providing job opportunities, I think China will dump the USD treasuries instead of devaluing yuan - this way they can maintain lower PPI within China and hence try to save the enterprises and keep running the investment related projects. However, if $ falls, then the Chinese banks assets will fall in value as well causing deeper bank runs. It is not clear that RMB will definitely rise. It will depend on Chinese evaluating what creates maximum job. And if they choose to pass the hot potato, they might start doing it in large volumes (and other FCBs follow) creating huge volatility in the currency market. I would think atleast there will be huge volatility. People with lot of money might think Yuan is better and then flipping to USD and back to Yuan/yen....I'm guessing in non-gold standard, currency volatility is likely to be the outcome and this forcing everyone to choose some stable currency for efficient division of labor/trade. I guess, the Trust in all currencies will be broken. In any case, holding money in RMB is not safe for non-Chinese. Why? If there is bank/bond run, one has to go and stand in line through night to collect whatever can be salvaged. You can not do that from outside China!