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At the end of February this year, the
value of the yuan fell by more than 1%.
This changed the long-standing trend of RMB appreciation.
On March 18, the Renminbi (RMB) exchange rate fell
again, and traded at 6.1858 to the dollar upon opening.
Experts believe that although RMB value has
reached an equilibrium, this devaluation could
cause the domestic property bubble to burst.
On March 15, China's Central Bank
doubled the yuan trading band to 2%.
On March 18, the RMB to dollar rate opened at 6.1858.
This is equivalent to depreciation of 77 basis points.
This is compared with the previous
trading day's closing rate of 6.1781.
It has hit a new low in 11 months.
RMB has fallen 2.5% this year.
The Wall Street Journal commented that, "the
decision, foreshadowed by months of hints by
Chinese officials, followed a week long campaign
by the country's central bank to weaken the yuan."
The People's Bank of China had just doubled the
yuan's trading band to 1% from 0.5% on April 16, 2012.
Since February this year, the Chinese
capital flow has been significantly reduced.
After a weak performance of exports in February,
data also showed a slow down in industrial added
value, fixed asset investment, and retail sales.
In addition, as of the third fiscal quarter of last year,
China's total foreign debt reached $823 billion.
The weakening of RMB will result
in increased settling up costs.
That is equivalent to an increase in external debt.
The Chinese Communist Party (CCP) Commerce
Department stated on Tuesday that the recent
RMB devaluation was intended to support exports.
A Ministry of Commerce spokesman said that,
"with the mechanism formation of RMB exchange
rate through the deepening of reforms, two-way
exchange rate fluctuations will become the norm."
So, why did the central bank lead the fall of RMB?
Financial analyst Ren Zhongdao says that within power
struggles, the CCP is manipulating the "economic card".
This is to attack the officials with vested interests.
Ren Zhongdao, financial analyst: "Jiang Zemin
had ruled the regime with greed and corruption.
He turned state-owned enterprises into the CCP elite's
source of wealth, and transferred national wealth overseas.
This returned to China as foreign investment for arbitrage,
to earn the interest difference and the exchange rate.
To combat these officials who escape overseas
with national wealth, the CCP has now brought
the RMB down to cut the interest difference."
Hong Hao, China Bank of Communications
Chief International Strategist, recently
commented in ForbesChina.com.
Hong thinks the RMB devaluation
will burst the real estate bubble.
He stressed that, in general, cheap exchange
rates will help a country to promote exports.
They will strengthen foreign exchange reserves.
Then, large-scale asset revaluation can be
carried out through currency appreciation.
Once the exchange rate is close to the
equilibrium point, asset revaluation will stop.
In July 2005, China started the exchange
rate reform of the RMB appreciation.
At that time, China's foreign exchange reserve was only
$800 billion, but now has quadrupled to reach $3.8 trillion.
At the same time, China's real estate
prices have soared to bubble levels.
Hong Hao stated that if one learns from history, devaluation
of RMB will pose strong resistance to elevation of asset
prices. These assets are mainly real estate and stocks.
Financial analyst Ren Zhongdao believes that
once CCP officials empty the hot money and run
overseas, China's real estate bubble will burst.
Ren Zhongdao: "Suppose someone
bought a property for one million yuan.
The market value is less than one million now.
But this person still has to pay the mortgage.
Finally, this house may be taken back by the bank, which
has no use for the property, and it cannot become cash.
In fact, at the end, the country and the financial
system are supported by people's hard earned money.
The CCP officials will leave after they get the hot money.
The government is also busy with infighting,
and will not care if the people live or die."
According to WSJ, "with the yuan down 2%
against the dollar this year, more of the bets
are losing money, said Geoff Kendrick, Head
of Asian Currencies and Rates at Morgan Stanley."
"He estimates that paper losses on one popular way
companies hedge their yuan exposure and individual
investors bet on the yuan, through what is known as
target redemption-forward products, have hit $2.3 billion."
"Beng-Hong Lee, Head of Markets for China at Deutsche
Bank AG in Shanghai, says his corporate clients are
concerned about how much more the currency will depreciate."
WSJ added, "while the recent declines likely aren't big
enough to trigger a stampede out of the yuan, the added