Chinese pegging Yuan to the Dollar

UFOinsider wrote:

China is actively buying up European portfolios: debt, currency, swaps, you name it, and they're trying to associate their currency to that as well. The sad part is that I believe the Euro is very overvalued...not unlike the British pound before Soros' big score, maybe even worse, and I don't think the Chinese fully understand markets when it comes to currency. Europe currently is a net consumer. We are too, but it can be fixed...Europe has simply exhausted their natural resource base. Our currency is more or less going to remain stable, regardless of debt level (we will reign it in) but Europe's will suffer a larger fluctuation, and this could impact the Chinese. The thing to remember with China is that it's a totalitarian regimen, so the value of the yuan inside China is what the government says it is. They will brutally enforce this and will prolong their own misery by doing so until the country either gets MORE autocratic and chokes itself (like N. Korea), or opens up and deals with things constructively (I think it will, and it's just a matter of time).

They're walking a very dangerous line by creating a 'backup' peg to the Euro. On paper, this helps them balance their accounting. In reality, it puts more decision making power into American hands because, well, we run things right now, and freeing us up from financial ties in favor of diplomatic ones lets us make them Europe's problem. In fact, the Euro might actually survive the half baked crap they've come up with these last few weeks, but I think the strain that China will put on them will force a larger correction.

The thing to remember with China is that they have a history of the following:
* Importing currency and holding it: they bankrupted the British Empire of silver
* Do not see outsiders as worth conquering
* Are inwardly focused and aren't very engaged in the world (this is changing)
* Are a net producer at the end of the day, and can resort to actual trading vs buying/selling
* Political stagnation with periods of upheaval

Net/net, they'll just end up back where they were about five/ten years ago if everything melts down, minus the easy access to foreign capital. The only realistic, long term solution for them is to liberalize and accept free markets. If they try to crack down on the population, I think we'll see a revolution: they've done this TWICE in the last hundred years, so it's entirely within the realm of possible.

SOOOO, that's the high level.

Long answer short: they really CAN'T break the peg and not suffer, they'll just shuffle around the issue and take stop gap measures until they explode...because that's how they roll. There's a slim chance of them just restructuring themselves according to the rules of sanity and logic (ie, capitalism + democracy). Hopefully, when the dust settles, they'll have a better social order.

Sorry for the long answer

Source: http://www.wallstreetoasis.com/forums/chinese-pegging-yuan-to-the-dollar

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