I divide the currencies I trade into two types. For purposes of carry trading over the past few years of low global rates, I’ve used more exotic or emerging market currencies like the Turkish Lira, Indian rupee, Hungarian forint, and South African rand. For all other strategies, I use what I think of as the eight majors; the USD, EUR, JPY, GBP, CHF, CAD, AUD, and NZD.
This isn’t entirely correct though, as these aren’t the eight most widely used currencies. There’s one missing, and I’ve read that it’s actually the fifth most used on the list. That currency is the Chinese yuan, or if you like, the Renminbi. But I don’t trade that one. I avoid it like the plague.
Before getting into the reasons for this, let’s clear up this issue of what the Chinese currency is actually called. Is it the yuan or the Renminbi? The answer is that it’s both. The Renminbi is the official name given to the currency of communist China by the party in the late forties. The yuan is the main unit of quantity. The analogy I’ve run into most often is with the British pound sterling. Sterling is the actual currency, but we count the amount of sterling in pounds. We wouldn’t say that something costs three sterling, but we’d say it costs three pounds. Similarly, we wouldn’t speak of a trade surplus of a hundred million Renminbi. We’d talk about a surplus of 100 million yuan. This Investopedia article is good introduction to the subject. If you want a more in-depth history of the currency, try this article from the BBC.
So the CNY (Chinese yuan) is emerging as one of the most used currencies around the globe. At the end of November, the IMF agreed to include the Renminbi as part of the basket of currencies making up its Special Drawing Rights (SDRs). So with all this international acceptance, why doesn’t this capitalist trade the thing, you ask? Well go ahead…ask!
Part of the mission of this blog, and my life’s mission in general, is to promote reason and liberty. That’s not just because I’m a heck of a nice guy (I’m not). It’s because reason and liberty work. They work in all facets of life, including the trading of currencies.
In order to understand and predict the behavior of currencies, those behaviors have to be the result of free, rational decisions. When that happens, we have a free market that can be analyzed using the tools of classic economics. In an upcoming ebook, I’ll be describing a method of analyzing daily economic releases from each country in order to quantify the fundamental appreciation potential of each currency against the others. This is a rational method of analysis based on free markets in transparent, open societies. And it can give me a profitable edge.
But this wouldn’t work with the yuan. The CNY is the currency of a society run by a regime that is neither open, transparent, free, nor rational.
Remember (and never, ever forget) that this is the government that massacred about 1,000 students in Tiananmen Square in 1989. The leaders may have changed, but the philosophy hasn’t. Even today, after decades of growth and international appeasement, the Chinese Communist regime of Xi Jinping is a dangerous, irrational, and repressive one.
As a result of their philosophy, the ChiComs repress their people, trying to micro-manage them from Beijing. This kills innovation and leads to economic stagnation, accompanied by almost comic attempts to cover it up with fake GDP numbers, and the building of ghost cities. Not so comic is the disappearance of several authors from Hong Kong who were critical of the regime. Not so comic either is the attempt of Xi’s government to distract the Chinese people from their economic woes by rattling sabers in the South and East China Seas.
But back to the economic silliness. A case in point (hat tip to the John Batchelor Show, where I first heard about this) is the odd 200-million dollar empty shopping mall in Shanghai, built to resemble the Pentagon building in Washington. I’m not kidding; you can see and read about it in this article by Jessica Phelan of GlobalPost, reprinted on the USA Today site. John asked some pointed questions about this on his show; who’s stuck with the mortgage on this joke? Is the Xi regime dishonest or just stupid?
Either way, this is not rational behavior. It’s the result of a dictatorship not subject to reality checks from its people, and thus prone to acting on arbitrary whims. This makes it unpredictable. And thus, its policy toward its currency is not predictable either. It’s subject to whatever political winds are blowing at the moment inside Beijing. The fact that the economic releases coming out of Beijing have no basis in reality, as documented by Gordon Chang and other journalists, is just another symptom of all this.
There’s no way to rationally analyze China’s currency. And that’s why I don’t trade it.
Until next time…keep pipping up!