Bitcoin and Gold and Yuan (A New Dilemma of Chinese Investors)

13.02.2016

Predicting currency fluctuations is a thankless occupation. It is difficult to follow all the shades of modern financial life. Periodic ups and downs of exchange rates sometimes are out of common logic and come as unpleasant surprises for both ordinary people and experienced experts.
According to Nasdaq, insignificant deceleration of local capital outflow from China smoothly developed into significant decline. Taking into account reality, the National Bank began implementing various currency manipulations imitating western colleagues. Let’s describe the nature of these methods and advisability of their use in specific conditions.
The term “currency intervention” means unloading a significant amount of dollars onto the domestic market and purchase of domestic contracts by tenders. Taking credits with soft lending rate banks unloaded them on Chinese currency market. Decline in demand for dollar led to stabilization of yuan exchange rate. Such a strategy is better than common sale of foreign-exchange holdings. The Central Bank of China pursues a reasonable lending policy. This strategy can be used periodically with no harm to financial reserves.
Despite its practical outcome, this measure is efficient only for a short period of time. It is possible to get maximum profit in case of perfect synchronization of synthetic mechanisms’ operation. Sooner or later Chinese government will have to return to traditional types of currency intervention which will further reduce strategic reserves.
We still remember December 2015. Contrary to optimistic prediction of experts on 20 milliard decline in yuan value, there was a rate of 108 milliards. We have to state that the stability of the national currency of the economic giant is hanging by a single hair. Apparently, the National Bank siphoned off a significant amount of its assets. It led to a fluctuation of yuan exchange rate and increase of capital outflow.
Massive currency interventions temporarily strengthened the exchange rate of the national currency at the end of 2015. At the beginning of the new year government suspended the policy of aggressive intervention. Panic sales, which started with loosening of regulation, became the reason to implement the institution of automatic early termination of trading if CSI 300 index declines more than 7% throughout a financial day.
 
The reputable expert, Chen Xidong, believes that all attempts of strengthening the currency without dollar credits lead to the yuan failure. Further sale of reserves and ignorance of control mechanisms may lead to currency and market crash. Expected that exchange rate of yuan will continue declining throughout 2016, while currency reserve losses may reach 3 trillion dollars.
 
It is a paradox but Chinese authorities contribute to the currency devaluation through unreasonable financial policy. The capital outflow is growing day by day. Predicted by experts depletion of reserves will lead to panic among population and investors.
 
It is surprising that the government takes short views on the subject. Tightening of control over international transactions against the background of depletion of reserves probably will cause currency failure.
 
Traders’ reaction
 
The beginning of a new financial year brought a new historical maximum of gold price – 1100 $. Bitcoin also continues strengthening its positions.
 
It is possible that Chinese investors will choose for investment other currencies (including Bitcoin) and gold. It will help them overcome mechanisms of government regulation and ensure security of finances.