NEW YORK – The Dow Jones Industrial Average closed Wednesday at 16,268 after gaining 601 points, as a week of roller coaster trading continued on Wall Street.
In the background, financial analysts are reporting the turmoil in the Chinese financial markets that precipitated the current global stock selloff is likely to continue as long as Beijing takes steps to jump-start sluggish economic growth.
In addition to devaluing the yuan Aug. 11, the Chinese central bank Monday cut interest rates by a quarter of a point in a move widely interpreted as reassuring investors that Beijing is willing to take any measures necessary to boost the Chinese economy.
The People’s Bank of China also reduced the reserve requirements by half a percentage point, making it easier for banks in China to lend to corporate borrowers in a move the Wall Street Journal reported effectively added 678 billion yuan (approximately $105.7 billion) to the Chinese economy.
The Chinese stock-market plunge triggered by the Aug. 11 devaluation has developed into the largest decline in the market since 1996.
China to devalue yuan by 20 percent?
On Tuesday, Bloomberg Business reported that the Chinese government anticipates devaluing the yuan by 20 percent by the end of 2016.
By comparison, the global stock market selloff was precipitated by China devaluing its currency only 3 percent.
Analysts familiar with research conducted by Chinese government agencies discovered the 20 percent devaluation target. At the current rate of 6.4 yuan to the dollar, the devaluation would put the rate at 8 yuan to the dollar.
The Aug. 11 decision to devalue the yuan came with the Chinese government’s assurance that market forces would be allowed in the future to play a larger role in determining the exchange rate. Until now, the Chinese government has rigidly managed the yuan, daily pegging it to the dollar and allowing it to trade 2 percent above or below that rate internally. An offshore rate closely tracks the internal fluctuation.
Allowing the yuan’s value to be determined by foreign currency exchanges instead of by government bureaucrats is an important move China must take if the yuan is to be compete with the dollar as a reserve currency in international trade.
China positions the yuan to compete with the dollar
As WND reported Aug. 14, China appears to be hoarding gold in a move calculated to win a place in the International Monetary Fund’s Special Drawing Rights, or SDRs. It’s a move fund analyst Jeffrey Borneman, CEO of Rampart Portfolio Partners, believes is calculated to challenge the United States dollar as the world’s leading reserve currency in international trading.
In July, China announced official gold reserves had increased almost 60 percent since 2009, with China’s central bank claiming gold reserves were 1,658 tons as of the end of June, up from 1,054 tons in April 2009.
In the past two weeks, China has sold more than $100 billion in U.S. Treasuries, as much as in the entire first half of the year, dramatically reducing foreign-reserve holdings in Treasuries estimated at $1.27 trillion at the end of June.
China’s foreign-exchange reserves are still at 134 percent of the recommended level, with approximately $900 billion available to be used for currency intervention without severely impacting its external position,
Standard Chartered Plc and AXA Investment managers have predicted that at least $1 trillion of global reserves will switch into Chinese assets if the IMF endorses the yuan as a reserve currency this year.
SDRs issued by the IMF are used typically by IMF member nations as a reserve account to support international trade transactions, not as international currency available to settle international debt transactions in danger of default.
In an important step, the G20 summit meeting in London on April 2, 2009, crossed the threshold toward the creation of a new one-world currency through a proposal calling for the IMF to use SDRs to replace the dollar as the world’s reserve currency of choice.
Point 19 of the final communiqué from the 2009 G20 summit in London specified: “We have agreed to support a general SDR which will inject $250 billion into the world economy and increase global liquidity.”
Despite the enthusiasm of the IMF to make the yuan the fifth currency in the SDR basket of currencies, the United States has consistently utilized its veto power to block China. The U.S. insists that China needs “currency reforms,” code words that experts in international finance understand mask a continuing U.S. resentment toward China’s manipulation of its currency’s exchange rate. The manipulation, the U.S. argues, artificially boosts Chinese imports in an effort to make U.S. exports to China more expensive.
