Now we have a better insight into the recent record level Gold buying by China. Head of PBOC talks about currency flexibility and acceleration of yuan convertibility. All announced reforms target to jump start the new phase of Chinese economic growth with Internal Consumption becoming the main driver. In this situation stronger Yuan means stronger purchasing power in China, less US Treasuries buying (which is happening already) and higher commodity prices in US Dollar terms.
RJ Wilcox: China’s Central Bank Gold Reserves are Growing Rapidly GLD, MUX, TNR.v, GDX
"We are monitoring the situation with Gold demand from China as it is the main driver for the Gold market now. So far this demand has backed Gold to withstand the numerous attacks in the paper market to allow Janet Yellen to implement even more aggressive easing polices at the FED.
Rising Gold price indicates FIAT currency debasement, pushes real interests up, which economy and fiscal budget can not sustain at the moment. These official Gold holdings numbers are already out of date and the question is how much Gold China really already holds now and you can add to it the state level encouragement for citizens to accumulate Gold in China."
US Dollar And Gold This Week - Janet Yellen: "There Are No Bubbles And More To Be Done." GLD, MUX, TNR.v, GDX, SLV
"Another very important input is coming from China this week after the conclusion ofThe Third Plenum. Details are still scarce, but what is coming out is nothing less than groundbreaking. China will relax its one child policy, abolish labor camps and will allow more private capital participation alongside with the state. Our take is that China is very serious now to build its internal market and will concentrate on the long term plan of the stimulating the transition to the Internal Growth oriented model.Walmart results are showing that FED QE wealth transfer policies can not make U.S. food stamps nation to prosper in any meaningful way and nobody can rely on it any more. What it means? Higher Yuan in the end and higher commodities prices in the dollar terms. That is why China is so active in securing the best available hard assets all over the world including Gold, Copper and Lithium."
Bloomberg:
PBOC to ‘Basically’ End Normal Yuan Intervention, Zhou Says
The People’s Bank of China will “basically” end normal intervention in the currency market, Governor Zhou Xiaochuan said, without giving a timeframe.
The yuan’s trading band will be widened in an “orderly way” as China seeks to enhance the currency’s two-way flexibility, Zhou wrote in an article in a guidebook explaining reforms outlined last week following a Communist Party meeting. The nation will phase out investment caps for both domestic and foreign investors, he added. A ceiling on deposit rates offered by local banks will be gradually removed as well, PBOC Deputy Governor Yi Gang wrote in the book.
People’s Bank of China Governor Zhou Xiaochuan wrote, “We will increase the role of market exchange rates, and the central bank will basically exit from normal foreign-exchange market intervention.” Photographer: Tomohiro Ohsumi/Bloomberg
“We will increase the role of market exchange rates, and the central bank will basically exit from normal foreign-exchange market intervention,” Zhou wrote. The central bank will “establish a managed floating exchange-rate system based upon market supply and demand,” he added.
Acceleration of yuan convertibility and liberalization of interest rates were among the key reform proposals decided on at the Third Plenum and published by the official Xinhua News Agency on Nov. 15. The party said it plans to achieve these targets by 2020.
“Even if Zhou hadn’t made these comments, yuan reforms were already heading toward liberalization, and it’s just a matter of time,” said Bruce Yam, a currency strategist at Sun Hung Kai Forex in Hong Kong. “These public comments suggest the speed’s picking up.”
‘Favorable Time’
China should seize “any favorable time window in yuan capital-account convertibility” to accelerate reform, Zhou wrote in the book. The PBOC’s Yi said in April the currency’s trading band will be expanded “in the near future.”
Twelve-month non-deliverable forwards in the yuan rose after Zhou’s comments were reported, gaining the most in a month to 6.1440 per dollar as of 6:07 p.m. in Hong Kong, according to data compiled by Bloomberg. The onshore currency closed little changed at 6.0927 in Shanghai. One-month implied volatility in the onshore yuan, a measure of expected moves in the exchange rate used to price options, jumped 13 basis points, or 0.13 percentage point, to 1.67 percent.
The Chinese central bank limits the yuan spot rate’s daily moves to 1 percent on either side of a fixing it sets every day. The trading band was widened in April 2012, after being expanded from 0.3 percent in May 2007. The yuan in Shanghai has traded 0.7 percent stronger than the fixing on average this quarter, down from 0.8 percent in the first nine months of the year, according to data compiled by Bloomberg.
Investment Quotas
China’s central bank governor said in November 2012 that convertibility will be the next step in the overhaul of the exchange-rate system. “We are going to realize it, we are moving in this direction, we need to go further, we will have some deregulation,” Zhou said at a conference in Beijing then.
Quotas under the Qualified Domestic Institutional Investor and Qualified Foreign Institutional Investor programs will be expanded and then scrapped, Zhou said in the plenum book comments. The PBOC will start a trial program, called QDII2, that will allow individuals to invest overseas, Yi said. The monetary authority has identified the QDII2 program as a major goal for this year, according to a statement on its website in January.
“We expect the changes to be gradual,” said Dariusz Kowalczyk, a Hong Kong-based strategist at Credit Agricole CIB. “This would likely put upward pressure on portfolio asset prices onshore.’
Borrowing Rates
China started publishing a new prime loan rate based on quotes from banks in October and signaled it may eventually replace the current PBOC benchmark. In July, the central bank scrapped a floor on lending rates.
The nation will ‘‘stick to the general direction of establishing and improving an interest-rate formation mechanism decided by market supply and demand,’’ Zhou said in the book. The PBOC will also promote interbank issuance, and trading of certificates of deposits will start soon, he added.
‘‘It’s a big step to take,’’ Patrick Bennett, Hong Kong-based strategist at Canadian Imperial Bank of Commerce, said by phone today. ‘‘My caution right now is these are statements rather than a timetable that we know will happen.’’
To contact Bloomberg News staff for this story: Fion Li in Hong Kong at fli59@bloomberg.net; Xin Zhou in Beijing at xzhou68@bloomberg.net"
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