Hunting Elephants With Pea Shooters; China Allows Yuan Denominated Accounts in US Banks

Those thinking the Yuan will quickly go soaring to the moon or that China is about to float the Yuan will offer as evidence the New York Times article Chinese Bank Launches Yuan Service in New York.

A state-owned Chinese bank says its New York City branch has begun offering accounts denominated in China's tightly controlled yuan in a new move to expand the currency's global reach.

Bank of China's announcement comes ahead of Chinese President Hu Jintao's visit to Washington next week. The White House says President Barack Obama will press U.S. complaints about China's currency controls that critics say keep the yuan undervalued and swell its multibillion-dollar trade surplus.

In a statement on its website, the bank said account holders can exchange up to the yuan equivalent of $4,000 per day, with a limit of $20,000 per year, while the limits are half those levels for non-account customers.

"They are trying to expand the scope of people who can hold renminbi and that increases demand," said Daniel Hui, a foreign exchange strategist for HSBC Corp. in Hong Kong.

Hunting Elephants With Pea Shooters

Let's not confuse steps that China needs to take to float the Yuan with reasons it is doing so. This is not about "expansion of scope" or increasing demand.

China is looking to deflect criticism of its trade policies and its foreign exchange reserves that jumped $199 billion to a record $2.85 trillion in the 4th quarter of 2010.

Congress already has threatened to label China a currency manipulator. China's record jump in forex reserves will add fuel to that fire. This is nothing more than a political ploy that will allow China to report "progress" on trade liberalization and currency policies.

Here is some simple math: China would need to open up 10 million accounts in the US, each with the absolute maximum of $20,000 in Yuan holdings, just to reach $200 billion. How likely is that?

If it did happen, China would have another $200 billion in US dollar reserves to deal with! Is that what China wants?

Allowing US accounts to buy $4,000 worth of Yuan a day, up to $20,000 a year, when China is sitting on $2.85 trillion in reserves already is much like hunting elephants with a pea shooter. It's not meant to do anything other than to make it appear as if something of practical merit is happening.

Nonetheless, I fully expect dollar bears and inflationists to be all over this story like sharks on raw meat.

Mish

GlobalEconomicAnalysis.blogspot.com

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