Stable China Economy and reserve currency goal + Weak US dollar policy = China economy passing by 2020

by

China’s recent currency gains could mean that sovereign wealth funds and central banks would increase allocations into yuan, pushing it into new trading ranges of around 6.3 compared to about 6.5 at the start of this year, analysts said.

“China’s intention to … keep the currency stable, with the objective of enhancing its role as a global reserve currency during the 2018 World Economic Forum, may lead to more yuan gains”, said Christy Tan, head of markets strategy and research for Asia at National Australia Bank.

Separately, state-backed Securities Daily newspaper cited Bank of China (Hong Kong)’s chief economist, E Zhihuan, as saying that yuan was likely to appreciate further because of dollar weakness as other central banks could exit from their quantitative easing policies quickly.

China Yuan could grow to level of British pound or Japanese Yen over ten years

A couple of weeks ago, Germany’s central bank announced it had decided to include the Chinese yuan in its own reserves, in a further boost to the international status of the currency.

The Bank of France confirmed that it held the Chinese currency as part of its reserves.

“In the long run, over the next decade or so, we expect the share of China in global reserves to increase to similar levels as to British pound and Japanese yen, both of which represent about 4.5% as of September 2017,” wrote FX strategist Adarsh Sinha and rates strategist Yang Chen of Bank of America Merrill Lynch.

Because the “global reserve allocations are a slow moving beast” rapid changes are unlikely, however, making this more important for the dollar in the long term rather than for its 2018 performance, according to Sinha and Chen. The buck’s role as the leading reserve currency “has been trending lower for close to two decades,” they wrote. “The correlation of the ICE U.S. Dollar Index with U.S. rates provides a real-time measure of when diversification is accelerating.”

Bundesbank board member Andreas Dombret said the decision was taken last year following an investment of 500 million euros ($611 million) by the European Central Bank, of which the German authority is a part. He said he wouldn’t comment on the amount that would be allocated

Trump Administration supporting weaker dollar policies

A day before Trump’s scheduled arrival in Davos for the World Economic Forum’s annual meeting, Treasury Secretary Steven Mnuchin endorsed the dollar’s decline as a benefit to the American economy and Commerce Secretary Wilbur Ross said the U.S. would fight harder to protect its exporters.

The greenback, extending its 2018 slide after Mnuchin spoke, is now at its lowest in three years as measured by the Bloomberg Dollar Index.

Continued Dollar Slide and China RMB catch up to Euro

Europe is China biggest trading partner. If the dollar slid so that the Euro was 25% stronger than a year ago, the Euro would be 1.31. The Euro is at 1.24. A year ago the Euro was at 1.05.

In 2014, the Chinese yuan reached 6.05 to the US dollar. If the yuan just kept up with the stability of the Euro then it could reach 5.5 on US dollar weakness.

A weak US dollar policy throughout the Trump term could see China economy pass in 2020 or 2021

There is more confidence in China economic growth with 6.9% in 2017 and solid 6.5-6.8% GDP growth projections for 2018 and 2019. This give China’s leadership confidence in allowing the yuan to strengthen against the US dollar and get close to the level of Euro strength. The US is following a weaker dollar policy.

 
      GDP in yuan       Exchange rate    GDP nominal    GDP with HK and Macau   GDP per capita  US GDP
2018a 90 trillion yuan  6.0              15.0 trillion  15.4 trillion           $11160          $20.2 trillion 
2018b 90 trillion yuan  5.5              16.4 trillion  16.8 trillion           $12171          $20.2 trillion 
2019a 99 trillion yuan  5.8              17.0 trillion  17.4 trillion           $12600          $21.0 trillion 
2019b 99 trillion yuan  5.3              18.7 trillion  19.1 trillion           $13840          $21.0 trillion
2020a 109 trillion yuan 5.8              18.8 trillion  19.3 trillion           $13800          $21.8 trillion 
2020b 109 trillion yuan 5.2              21.0 trillion  21.5 trillion           $15400          $21.8 trillion
2021a 119 trillion yuan 5.8              20.5 trillion  21.0 trillion           $15000          $22.7 trillion 
2021b 119 trillion yuan 5.2              22.9 trillion  23.4 trillion           $16700          $22.7 trillion

Poland has an IMF projected 2020 GDP per capita of $16688.

Various currency trading websites are now predicting the RMB could strengthen to 6.0 by the end of February, 2018.

By the end of the first quarter of 2018, China economy would have grown to about 84.5 trillion yuan (growing about 1.8 trillion yuan each quarter from the end of 2017 82.7 trillion), China’s nominal GDP would be US$14.1 trillion if the exchange was 6.0. GDP per capita would be over US$10,000.