A Look Back at a Year-Old Yuan/USD Forex Rate Prediction

A year ago, I wrote an article titled, “Is China’s Gold Plan Revealed in its Yuan/USD Forex” planning, in which I issued a yuan/USD forex rate prediction that completely dismissed the ongoing dominant narrative about the Chinese government’s desire for a weaker Yuan that lacked complex understanding of the global currency wars and the public deception that accompanied true motivations remaining hidden from the public.

In that article, I stated the following.

Though the yuan strengthened slightly from 1994 to 2020 against the USD, now trading at an exchange rate of 7.08 yuan to 1 US dollar in June 2020, it still remains extremely odd, in my humble opinion, that during the entire period depicted in the chart above, given the explosive growth of the Chinese middle class since 1999, that a 100 yuan note remained the largest denomination in China. It remains odd until one considers the following factor. The ruling class in China is well known for playing the long game in policy matters, including monetary policy. It is not rare for them to have a 50-year or even a 100-year plan versus the typical 1, 5 and 10 year plans implemented by the ruling class of Western nations.”

As a consequence of understanding Asian culture exponentially better than the majority of my Western counterparts, I came to a conclusion unreached by most others. Many Western analysts inexplicably take the word of Asian politicians and finance officials at face value, an extremely naïve view not only of Asian politicians but of any politician. There is undoubtedly a game being played in the public forum involving global currency wars, and a high level of deception in publicly issued “official” statements still not understood by many Western analysts. Contrary to naïve analysis that ignores the reality of these managed perception games in the global currency wars, and from even more naïve conclusions drawn from Western analysts that believe they uncovered true financial policies of the Chinese State simply by scanning Chinese media sites and using Google translate to translate simplified Chinese into English, I presented this conclusion a year ago about the future of the yuan/USD relationship that stood at an exchange rate north of 7 yuan per USD at the time.

A year ago, I openly questioned the Chinese State narrative of wanting a weaker Yuan, which appeared logical by extrapolation of official statements, and instead, posed the scenario that a much stronger yuan would materialize, much to the shock of most people that closely followed the yuan: USD exchange rate. In reaction to State officials issuing statements about how the yuan should be narrowly managed within a tight range, I posed this question a year ago: “What event could cause such a massive surge in strength of the Chinese yuan versus the US dollar? The answer is China’s gold plan, both in the intermediate and long-term.”

Indeed it appears that the  China gold plan is moving forward and that this behind-the-scenes planning has caused the very significant rapid strengthening of the yuan versus the US dollar. Despite the yuan/USD exchange rate going exactly to plan as I expected, and against the grain of everything stated by Chinese “officials”, analysts still continue to take Chinese officials’ comments at face value and report on them as if they are the policy mandates of the Chinese State (which I can almost guarantee you is not). For example, this article here, published just two months ago, quotes many Chinese officials issuing very public forex policy statements including the following:

China has seen a flood of capital inflows this year, fueled by the economy’s strong recovery and relatively higher interest rates compared to advanced nations. Yi Huiman, the head of China’s securities regulator, warned this weekend about the risks of ‘hot money’ flows, which he said could endanger the healthy development of markets and should be strictly controlled. Speaking at the same event, newly appointed central bank adviser Wang Yiming said a stronger-than-expected U.S. rebound could lead to capital outflows from emerging markets with the potential to create ‘financial market turmoil.’ A commentary in the influential China Securities Journal on Tuesday said that outflow risks were controllable.”

In addition, Li Daokui, a former member of the People’s Bank of China’s monetary policy committee, stated, “This year may be a bumpy year in terms of capital outflows. The central bank may increase its range of foreign exchange market trading in order to avoid accumulation of pressure on one side or the other.”

All of the above comments from China State “officials” are meant to give the appearance that the Chinese State policy is not for too much movement on either side regarding the Chinese Yuan and to keep it controlled within a certain range with not too much weakening and not too much strengthening. But the Chinese yuan, as shown in the chart below, has strengthened against the USD, and strengthened massively by more than 12% in less than a year’s time.

So why is reality so out of alignment with official publicly issued statements. Do you really think in a world in which financial assets are so easily manipulated, that the PBOC could not have done a better job in keeping the Chinese Yuan: USD forex rate more tightly controlled versus allowing it to strengthen massively by more than 12%? Again, the rolling out of a China gold plan would 100% require a strengthening yuan, so despite a great number of forex analysts still stating that the Chinese State will now intervene to boost outbound capital flows to artificially weaken the yuan now, everything is going to plan as I see it, and the yuan will continue to strengthen. How much? Just reference the article above that I wrote a year ago to understand the possible end game.

J. Kim

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