What will happen to China's Currency?

From Epoch Times, some good analysis of the current situation with China’s currency, the RMB, also known as the yuan. If you’ve ignored this topic, it’s time to start paying attention as the great financial cram down of all cram downs is about to take place. In a nutshell, China has been manipulating their currency to build up huge amounts of exports, at the expense of jobs and manufacturing in their developed country customers. This has resulted in trillions of $ worth of assets piling up in China’s bank accounts and now they are the largest creditor to the U.S. Presently, conventional wisdom is that China will be able to use the current financial crisis to its advantage, increasing influence in the world economic system and playing things to its advantage…

However, China’s economy has been slipping downward since July 2008, reflected in the pessimistic dismal trade and industrial growth data. While China has lowered its expectations and shifted its economic priority to “maintaining growth,†chances for further RMB appreciation seem to be slim and depreciation is looming on the horizon. If things continue along this track, an appreciation will be a disaster as the ensuing export decrease will bring about massive bankruptcy and job losses.

…and we all know this could lead to massive social unrest in a country where the last time a situation like this occurred was 1989, resulting in Tiananmen Square. If you are thinking the banks in China are on a more solid footing than those in the U.S. or Europe, guess again. Most banks in China are insolvent because of the corrupt way of issuing loans to communist party members that mysteriously never get repaid, yet remain on the books…

Two other factors play a major role here. The first is the huge financial black hole in China’s banking industry. The accurate amount of bad debts may remain a mystery forever, but it cannot be lower than thousands of billions of yuan. This alone would doom the RMB into devaluation.

The second factor is that all major countries such as the U.S., E.U., China and Japan are all bailing out their economy with huge amount of money. Where is the money coming from? Issuing bonds and currency are both major options which, however, will accelerate currency devaluation. The Chinese authorities’ 4 trillion investment plan not only shocked the nation, but also alarmed Western countries of potential RMB devaluation. This sum of investment equals 16.23 percent of China’s 2007 GDP, while the bailout money in U.S., $ 850 billion, equals only 6.2 percent of its GDP. Since 1980 China has been in deficit in all the years except 1985. Then where did the authorities obtain money? Besides, China’s local authorities, following the example of the central government, launched an even larger plan of 180 billion, which may further raise the expectation for the RMB devaluation.

…This points to devaluation and hyperinflation for the Chinese yuan, which has many not so good implication for the rest of the world’s financial system.