Is the RMB’s Value Increasing or Decreasing?

By Victor H Fischer PhD

Problem

Almost all Western Financial authors are totally confused and wrong concerning the TRUE value of China’s Renminbi (人民the People’s Currency “RMB”).

The statement that: The consensus the Western Economists are seeing the RMB will become weaker, and fall to 6.8 by the end of next year is total insane, because it illustrates a lack of knowledge concerning the US Dollar – RMB conversion process. This knowledge is very important since Gold’s Purchasing Power has remained constant for at least 5,000 years.

History of the SGE

The Shanghai Gold Exchange (the “SGE”) officially started operation on October 30, 2002, and is a membership-based and self-regulatory legal entity established by the People’s Bank of China (the “PBC”) upon the approval of China’s State Council and registered with the State Administration for Industry and Commerce. Regarding facilitating market development as its top priority, the SGE organizes the trading of gold, silver, platinum and other precious metals and provides relevant services for members and investors in a cost-efficient manner by adhering to the principles of integrity, equitableness, justice, and transparency. The SGE is subject to supervision and regulation by the PBC pursuant to law.

The Shanghai Gold Exchange Functions

The SGE is authorized to:

  1. List gold, silver, platinum and other precious metals for spot, deferred and derivatives trading, as well as provide related services;
  2. Execute transactions through price matching, price asking or otherwise;
  3. Provide venues, facilities and related services for the trading of listed products, design products to be traded, arrange the listing of products, adopt trading rules, and organize, supervise, and regulate transactions, settlement, delivery and other related business activities;
  4. Draft standards for construction of the gold market infrastructures, formulate delivery standards, provide trade registration as well as services pertaining to accounts, custody, delivery, clearing and settlement, storage and transportation, and pledging and leasing;
  5. Supervise and regulate its members in accordance with the Articles of Association of the Shanghai Gold Exchange and the trading rules of the Exchange; and
  6. Perform any duty as otherwise prescribed by the PBC.

The Shanghai Gold Exchange Products

The SGE offers 13 products covering gold, silver and platinum on the Main Board. With the listing of three physical gold products on the International Board, a multi-tiered trading system is taking shape, which bridges the Main Board and the International Board and operates centralized price matching with OTC trading as supplement.

The SGE is open for trading from Monday to Friday (excluding public holidays) and the trading hours on each trading day include three sessions, i.e., Morning Session (9:00 a.m. – 11:30 a.m.), Afternoon Session (1:30 p.m. – 3:30 p.m.) and Night Session (8:00 p.m. – 2:30 a.m.).

The SGE follows the “netting, segregation and multi-tiered” approaches for currency payment clearing. At present, 18 Settlement Banks certified for the Main Board and 7 Settlement Banks certified for the International Board—including all major commercial banks and some medium-sized commercial banks with strong regional service capabilities in China—provide prompt clearing services to corporate customers and individuals trading on the SGE, and offer solid protection against any risks relating to client funds.

The Shanghai Gold Exchange Network

The SGE currently has a network of 58 Certified Vaults (of which 55 are for gold storage and three are for silver storage) in 36 cities nationwide covering all major gold refinement and consumption regions, providing physical delivery, transfer, logistics, and transport services to enterprises and individuals across the country. Meanwhile, International Board Certified Vaults provide additional services relating to the transshipment of physical gold bullions between two foreign trading parties.

Today, the SGE is a bustling trading venue that boasts 167 domestic members and 40 international members admitted to trading on the International Board. Nearly 8,000 corporate customers and over seven million individuals trade on the SGE through their carrying members. The SGE has been dedicating itself to serving the real economy and industries ever since its inception, and is tireless in bringing more and better investment opportunities to investors.

The SGE is committed to shaping the SGE into a precious metals exchange with significant global influence, transforming Shanghai into an international gold trading center, propelling China to a more active role in the global gold markets, and contributing to the prosperity and development of the global gold markets for the primary purpose of producing a stable and sustainable purchasing power of the Renminbi and the Yuan.

Conversion of RMB Per GM of Gold To a US Dollar Per Troy OZ of Gold

The SGE’s previous the RMB Median Values (the value below which 50% of the cases fall) of the RMB Benchmarks for a single gram of 999.9 pure gold is listed as follows:

  • Since December 19, 2014 the Median Value was 236.28 RMS
  • Since April 1, 2015 the Median Value was 233.80
  • Since July 1, 2015 the Median Value was 229.74
  • Since October 1, 2015 the Median Value was 224.24
  • Since November 1, 2015 the Median Value was 222.61
  • On December 18, 2015 the RMB’s Present Value was 221.12

These RMB values illustrate that the RMB’s value for a single gram of 999.9 pure gold is getting stronger and not weaker as the consensus of the Western Media Economists.

When China lawfully attaches a constant RMB price for one gram of 999.9 pure gold for many years, then the equation for the conversion of RMBs to US Dollars becomes very simple and totally controlled by the Global Market Value of the US Dollar.

The equation for the true conversion of a RMB per gram of gold to an US Dollar per Troy ounce of gold is as follows: The long-term restrained RMB price of one gram of 999.9 pure gold times the conversion of grams to a Troy ounce (31.10347680 grams/ounce) becomes a constant value for the conversion of RMBs to US Dollars.

The equation for this conversion is: The PBC restrained price of the Chinese RMB per one gram of gold times the conversion value of the number of grams contained within in one Troy ounce, which is then divided by the market price of the US Dollar per Troy ounce of gold. On December 12, 2015 at 9:18a.m. the market RMB price of one Troy ounce of gold was 6,866.3350 (which is 220.7578 RMB). The market US Dollar price of one Troy ounce of gold was US$1,064.3500. Therefore, the conversion equation would be: 6,866.3500 divided by 1,064.3500 equals the ratio of 6.4512 RMBs per one US Dollar.

If the fixed market RMB price of one Troy ounce of gold was still at 6,866.3350 RMB and the market US Dollar price of one Troy ounce of gold that had inflated to be US$2,000, then the conversion equation would be: 6,866.3500 divided by 2,000 equals the ratio of 3.43316 RMBs per one US Dollar.

If the RMB value was fixed by the PBC, and was still priced at 220.7578 RMBs per one gram of 999.9 pure gold, then a constant value would be: 220.7578 times 31.10347680, which equals 6866.33511072 RMB/Troy ounce. If the US Dollar market price per Troy ounce was computed to be 3.43316 then the predetermined fixed constant of 6866.33511072 RMB/Troy ounce would divided by 3.43316 and then would become weaker, and inflated to the sum of US$2,000.00 per Troy ounce of 999.9 pure gold.

This demonstrates that the computed market price of the US Dollar is a critical exclusive source of the RMB – USD exchange ratio, and not the value of China’s stable and sustainable RMB.

The following statement by the People’s Bank of China submits that since the US Dollar Market Value is critical for a stable and sustainable RMB-USD exchange ratio that the US Dollar Market Value should be based on a basket of many sovereign world currencies.

 The Launch of RMB Index Helps to Guide Public View of RMB Exchange Rate

http://www.pbc.gov.cn/english/130721/2988680/index.html

Guest Commentator of CFETS, Dec 11th, 2015

The China Foreign Exchange Trade System (also known as CFETS) has published CFETS exchange rate index on its website on December 11th. This will help bring about a shift in how the public and the market observe RMB exchange rate movements.

For quite long, market participants have used bilateral exchange rate of RMB against USD to assess RMB exchange rate movements. However, as fluctuations of exchange rate serve to adjust trade and investment activities with multiple trading partners, the bilateral RMB-USD exchange rate is not considered a good indicator of the international parity of tradable goods. Therefore, it is more desirable to refer to both the bilateral RMB-USD exchange rate and exchange rate based on a basket of currencies. The effective exchange rate index, on a weighted average basis, describes the relative strength of a country’s currency against a basket of foreign currencies, and reflects the overall value change of that currency. Compared with referring only to one currency, a basket of currencies can better capture the competitiveness of a country’s goods and services, and better enable the exchange rate to adjust import, export, investment activities and the balance of payments position. The publication of CFETS exchange rate index provides quantitative indicators for market participants to observe the RMB exchange rate movements, and offers a more comprehensive and accurate way to assess market conditions.

Looking at international experiences, the Federal Reserve, the European Central Bank and the Bank of England all publish   their own exchange rate indices, while intermediate  institutions also publishes their indices. For example, the U.S. Dollar Index released by the Intercontinental Exchange (ICE) has become a major index in the international market. Therefore, it is consistent with international practice that CFETS publishes its RMB exchange rate index. Since the beginning of 2015, the trend of this index has been relatively stable. The index is 102.93 on November 30th, appreciated 2.93% from the end of 2014. This shows that, even though RMB has depreciated against USD since the beginning of this year, it has appreciated modestly against a basket of currencies. Therefore, RMB is relatively a strong currency among the major international currencies.

The CFETS will regularly publish the RMB exchange rate index. This will help guide market participants to shift their focus from the bilateral RMB/USD exchange rate to the effective exchange rate, which is based on a basket of currencies, in their efforts to observe exchange rate movements. This will contribute to maintaining the RMB exchange rate basically stable at an adaptive and equilibrium level.

In order to provide more reference points, CFETS will also publish RMB exchange rate indices based on the SDR currency basket and the BIS currency basket respectively. By the end of November 2015, the above two indices had appreciated 3.50% and 1.56% respectively since the end of 2014.

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