Tags: China | yuan | free | trade

The New Phase of Emerging Markets

By    |   Wednesday, 26 Feb 2014 07:23 AM

There is a lot being written about the emerging markets, the nearly developed markets and the markets in between. Much of it is written by writers who love to panic or spread despair.

Many of them have never been to Asia and yet feel compelled to write about China.

Having spent over a decade regularly visiting China, I can tell you that things may be a bit slow in China, but the sky is not falling down there. The recent moves of the Chinese yuan are greatly overanalyzed and extrapolated. Like most currencies in the world, the yuan is subject to volatility and can never be expected to be a one-way street. Since it is managed and controlled by the Chinese government, it becomes their role to occasionally shake out the overheated one-way bets in the currency and drive away the speculators.

The yuan has declined during the past few days after continually rising for the past several years and hitting record highs against most currencies. This move down is actually a very good thing and would be considered normal in a free market move.

Due to the fact that the moves within the yuan are opaque and not known to the world gives writers the opportunity to speculate the reasons or create their own fantasies about the cause of the drop of the currency. For the past 10 years, I have been reading stories periodically about the imminent collapse of China and how the sham cannot continue. The hordes of China bears are blaming this downward move in the yuan on the fragility of the Chinese economy. I would not subscribe to this theory.

In the past 10 to 15 years, China has not suffered any significant collapse. Granted its GDP growth has moderated, but that is because the government intended to do that to avoid an overheated property and stock market. Having learned the lesson from the 2008 crisis in the United States, the Chinese are wary of any such spikes in assets that can lead to a dramatic collapse overall.

If we believe that this downward move in the yuan was actually engineered by the People's Bank of China, we would see a new strategy emerging from the central bank and maybe a signal of a major policy shift move about to be announced. The Premier of China has already announced that there will be reforms introduced to make the yuan more market friendly. If we now believe that the People's Bank of China will expand the trading band of the yuan to +/- 2 percent from the current 1 percent, we will see a new phase start in the yuan as it gets ready to take another step in the direction of becoming freely traded. The freely traded currency might be three years away, but it will be upon us before you know it.

I first bought the Chinese yuan in 2007 and have enjoyed a fair bit of gain in the past five years. Nothing earth shattering, but a steady 15 to 20 percent gain during that time. It might be time for me to add more to this asset class and further diversify my investments.

I suggest you take a look at buying the yuan in your portfolio as well.

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Advani
There is a lot being written about the emerging markets, the nearly developed markets and the markets in between. Much of it is written by writers who love to panic or spread despair.
China,yuan,free,trade
546
2014-23-26
Wednesday, 26 Feb 2014 07:23 AM
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