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Forex Analysis and the Yuan

By: bsullivan

The Yuan (CNY) has been a focal point for economists and forex markets for decades. The exchange rate, a long-time sore spot in Washington, is fixed. That is, the Chinese government maintains a strict rate against the dollar and does not allow free trade of the Yuan. Critics claim this gives China an unfair advantage in the world marketplace. China maintains the need for economic stability of its young and growing economy.

What is the Yuan?

In forex analysis, the Chinese Yuan refers to Renminbi (CNY). Yuans are the base unit of a number of Chinese currencies. Yuans are also called Kwai, meaning piece. The actual coins are called Renminbi, a system similar to England. Pounds are units and sterling are coins, so you say, "I have 10 pounds sterling or 10 yuan renminbi. Yuans are subdivided into 10 Mao and then 10 fen.

A Little History

The word yuan actually means round object and started as a silver coin in the Qing Dynasty. The modern yuan was first introduced in the 1880s. It replaced the copper coins and silver ingots that were in current use. Originally, it had the same specifications as a silver dollar putting it on par with the US. The move away from the gold standard has changed that, impacting the entire global financial system.

China Now

China is feeling the same economic crunch as the rest of the world. Massive building projects, rapid economic growth and a dependency on foreign trade left them vulnerable to the world's credit problems.

China had been growing at double digit rates for years, a pace many believe to be unsustainable. Recently, headlines from China show a reversal of policy as regulators order banks to shore up their reserves. Fears of a credit crisis, similar to the one in Europe, have been creeping in. Banks had been encouraged into massive lending to help stimulate its faltering economy.

Trading the Yuan

The People's Bank of China has kept tight reign over the valuation of the yuan since 2005, pegging it to a range based on the US dollar. Critics claim that China manipulates its currency to gain an unfair advantage over other countries. In more recent years, the Chinese government has hinted at loosening the restrictions around the yuan, but little has come until now.

Within the last month, the PBOC announced a surprise move and followed through, allowing more flexibility in the yuan's value. The US Treasury responded by saying that China's move to un-peg the yuan was significant. The PBOC has begun a series of increases in its valuation of the yuan. They have raised its mid-point value and relaxed the range in which the yuan can move. In the wake of this, the yuan has appreciated versus the dollar with some volatility not normally allowed by the PBOC.

China Tomorrow

China is in a stage of transition. Keeping the yuan undervalued allowed Chinese industry to buy materials cheaply, fueling its export market. Allowing the yuan to appreciate will mean higher costs for Chinese manufacturers, and will ultimately impact the export market. China can no longer rely on its export market to support its economy. China needs to redirect its economic policy to improve its domestic markets. Such a move will also help to balance our trade deficit with China, allowing the U.S. and other countries to compete on more even financial ground.

China will continue to be a world leader into the coming decades. Keeping abreast of events as they unfold is crucial to understanding the forex markets and trading the yuan. For the latest from China and all the world's banking centers, visit: ForexEgg.com. They provide up-to-the-minute headlines and links to every central bank.

For more information visit: http://forexegg.com

--
Tommy Hughes is a successful and largely self taught economy watcher and market speculator. He has extensive knowledge of risk management and asset allocation, stock and options trading as well as market analysis. Tommy has worked in the fast paced restaurant industry for over 15 years. Tommy also writes for food publications such as Becket Media's "Grilled" Magazine. Tommy enjoys mountain biking and brewing beer. Tommy lives in the Asheville, North Carolina.For more information visit: http://forexegg.com

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