Is China Winning a Rigged Game Against Your Money?

China is now using a depressed yuan to help buttress its weakening economy brought on by exploding private and public debt. According to an article in MarketWatch, Michael Arone, chief investment strategist for State Street Global advisors, feels the depreciation of the yuan poses a more serious danger to the global economy than Brexit.

The day of the Brexit referendum, June 23, 2016, Chinese officials quietly provoked a 1% decline in the value of the yuan against the dollar. This concluded to be the biggest one-day devaluation of that currency since August 11, 2015, the date many financial experts attribute to the global market disaster later in the month.
The current devaluation, according to Arrone, may be a sign of contraction in China’s economy, and could represent an effort to sustain slowing GDP growth by exporting deflation to protect that nation’s exports. Since bad debt could very well cause China’s economy to plummet, the weakening yuan (or renminbi) is the country’s way of finding an acceptable way to deleverage its debt.
China has the highest corporate debt ratio in the world. The International Monetary Fund predicts the nation’s potential losses from defaults of corporate loans could easily exceed 7% of its GDP.
But the weakness of the yuan disguises an even more pressing economic situation. While stringent capital controls have somewhat managed to limit capital flight from China, Chinese officials have cleverly found ways around the problem. Fears about capital flight had helped prompt the last two global equity liquidations.
A third such selloff could trigger weakness in the global economy, a decline in equity markets, and a widespread move to gold by as a safe haven by a large segment of the investment community. Obviously, such a move would trigger a big rise in the price of the shiny metal.
The second force that could drive gold is its current ratio to other commodities. The factor customarily used for other commodities is the Commodities Research Bureau Index or CRB. The ratio of the gold price divided by the CRB index is currently 7.3, a multi-decade high. While most commodities have climbed in price since 2000, gold has moved up about six times as much. Certainly one of the reasons for this is that gold, like the other precious metals, is a financial commodity – indeed, the most important financial commodity.
The devaluation of the Chinese yuan, and the ratio of gold to the CRB lay the groundwork for gold’s aggressive climb. Recent inactivity on interest rates domestically with the Fed’s meeting last week poise a further catalyst.
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