Thread on Chinese Currency Manipulation. You're going to like this. I had a question for my analysts, what does it mean "China is manipulating its currency?" I've distilled their answer. You're about to become a pundit destroyer. Let's begin...China has a dual currency system...

1. The ‘onshore’ currency is the Renminbi (RMB) or yuan and also called the CNY. It is only used to pay bills on the mainland. The onshore currency can’t be used for international transactions. There...

is no real market for the exchange rate, instead the People’s Bank of China (PBOC) comes up with a price every day thru an unknown equation, and then trades around it. 2. The “offshore” currency, also called the yuan or CNH, is used for international clearing and trading.

The CNH has a completely separate set of demand and supply conditions from the onshore RMB.

The Chinese have it both ways, huge inner stimulation to appease the people. Strong external currency to maintain purchasing power outside.

By controlling the supply of CNH (offshore money) outstanding China can create a CNH shortage. They’d just buy the offshore currency to drive the value/price up.

Alternatively they can sell the offshore currency, flooding the market with CNH to drive the value/price down. For example, when a foreign Purchaser of goods has to settle the transaction, and there’s a shortage of settlement currency (CNH), his/her cost goes up.

Conversely, if there are boatloads of CNH available his/her cost goes down.

How this affects trade. Bear with me, we’ve got to get a little technical. By managing the global supply and therefore the exchange rate of the onshore currency needed by ‘outside’ companies doing business with China, the Chinese Government has been able to generate US$ trillions

of additional compensation for their net exports as well as purchase US$ Trillions of EU/Western/Offshore assets at a significant discount. Simultaneously, the Chinese Communist Party, the one party owner of the State, has been selling Mainland (RMB Denominated) Assets to

EU/Western/Offshore Businesses and Investors at a grossly inflated price.

And that’s a bigly reason for the huge trade imbalance

Economic outlook, debt levels, tail/headwinds, interest rates, politics, supply/demand for the currency, current account balances/deficits and a witch’s brew of other factors all contribute to determining exchange rates. That’s what it means when a currency “FLOATS”.

The RMB (the onshore only currency) is the only currency issued by a major economy that does “NOT FLOAT”.

It’s value is untethered to the health of its’ economy and other considerations in the marketplace. It’s currency exchange value is ‘made-up’ by the Peoples Bank of China

Let’s do the forensics on how they make a trade imbalance by manipulating their currency. 1. When a US COMPANY BUY BUYS goods from China, 1. he/she pays in dollars. 2. The banks exchange the dollars for CNH (offshore money), 3. the banks must convert the CNH to CNY...

(from offshore money to onshore money) then..4.the exporter of goods receives CNY (to pay staff, bills, etc.,).

The same happens (in reverse), when a CHINESE COMPANY PURCHASES US goods. 1. The Chinese company pays in CNY (the onshore currency), then…2. his/her bank exchanges the CNY for CNH (the offshore currency) 3. and eventually to the FOREX (foreign exchange markets used to sell

international transactions)necessary to complete the transaction.

The Peoples Bank of China (PBOC), because of their gigantic foreign currency reserves (all the world’s money that is used to pay for Chinese goods), can make the value of the CNH virtually any number they like. Like a thinly traded stock, the PBOC can buy up all/most of the

outstanding CNH making it difficult/expensive to close transactions. Conversely, they could flood the market with CNH driving the value of the CNH down.

Without the dual onshore/offshore currency system, where the Peoples Bank of China is able to shrink the “Usable” offshore currency (CNH) in circulation, propping its value to absurd levels, while simultaneously flooding the domestic streets with its onshore money, this US$

exchange rate relationship would simply not be possible. And that’s a bigly reason for the huge trade imbalance

When there is ‘more money’, it should be worth less. That’s the physics of currency exchange rates in a free market. But to China, economic physics don’t apply. China onshore money is gravity defying. Generally, all else being equal, as the money supply increases you’d expect

inflation and a weaker currency.  Again, if the Chinese were operating as a market driven economy and a floating currency, this would not be possible.

What is the exchange rate of the RMB?

Because the RMB (onshore currency) value is based on a tiny offshore sliver of the total amount of currency in circulation, virtually EVERY economic relationship between the Rest of the World (ROTW) and China is based on their manipulated currency.

Right now, the only value the ONSHORE RMB has to the rest of the world (ROTW) is to facilitate trade and investment with China. The dual currency system makes the value and amount of currency in circulation on the mainland irrelevant to the rest of the world.

What matters to the ROTW in terms of supply and demand is the accessible amount of RMB available to settle transactions with China. Unlike the Dollar, Euro, Pound and Yen, which can be converted to most currencies instantly, almost anywhere in the world (except mainland China)...

are only a few places on the planet that the Chinese Communist Party, the one-party owners of China allows RMB (CNH) to hide.  The RMB, onshore money, located in clearing centers around the world has been declining. China has created a shortage in it to drive its price up. Total

“Offshore” currency available for international transactions is roughly 0.7% of all RMB in circulation, down from about 1.6% in 2015. There’s just not a lot of onshore money to go around, so, its price goes artificially higher

here's the example: Apple buys a shipment of iPhones from FOXCONN in China. 1. Apple takes delivery of the iPhone shipment and has to pay FOXCONN. 2. Apple has dollars and FOXCONN wants the onshore money needed so it can pay wages, raw material costs, utilities,...

kickbacks, etc, in China. 3. Apple has an account at JP Morgan and sends US$ wire instructions. 4. The Bank of China (FOXCONN’s Bank) receives the US$ and forwards the equivalent onshore money to FOXCONN’s Bank of China Account on the Mainland. 5. The Bank of China (Hong Kong

Branch) needs to replace (like the way two cash registers settle money when one register needs singles and gives the other a large bill to break) the onshore currency so they borrow the RMB from the mainland home office.

6. The Hong Kong branch can now loan out or invest their US$ deposits...

So now that you're super smarter than the pundits, lets sum it up so when people ask, you can give them the simple. It goes like this. 1. China’s dual-currency system enables the Chinese Central Bank to manage the value of its global currency (CNH) to a benchmark which is

becoming more removed from its real economic value by the day. 2. This artificial strength, allows Chinese sellers of goods, as well as Chinese Investors to trade their onshore (garbage) money for real, reserve currencies/assets like US Real Estate (see California).

3. The rapidly expanding money supply, debt levels and massaged NBS/PBOC data effectively mask the accelerating deterioration of China’s onshore “real” economy. Now initiate some dinner arguments about Chinese currency manipulation. You'll win. /The end