Minyan Mailbag - China Banking 2006
Note: Our goal in Minyanville is to remove intimidation from the financial markets and encourage an interactive dialogue among the Minyanship. We share this next discussion with that very intent.
Good Morning John,
Thanks again for sharing your thoughts on MV. It's always a pleasure to see what you have to say.
A friend who travels frequently to China has described the Chinese people as deeply conservative with their money. Many distrust the state banks. It is regularly believed that the banks are probably insolvent, but with little other choice, they keep their yuan put. Many folks he speaks with await anxiously the opening of foreign banks at the end of 2006.
My question is how does this looming flow of yuan out of the state banks affect the currency and treasury markets going forward? Will this cause the dollar to strengthen? Will the Chinese state banks have to sell Treasuries to keep up with local demand for yuan? 2006 seems very important.
The opening recently of the gold exchange in China will likely cause some domestic allocation out of the yuan into gold. An anticipated widening of the yuan band should also lead to less repatriation into dollar assets. There also could be incremental selling of U.S. dollar assets to as you state, "shore up the Chinese banking system".
Chinese domestic flows of yuan versus the dollar is relatively minor compared to world-wide flows in the dollar. The next 12-18 months will likely determine the fate of the U.S. dollar as the world's reserve currency.
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