Will a Burst Chinese Real Estate Bubble Destroy the Yuan?
From news reports we see that the overheated Chinese real estate market continues to rise. This happens despite evidence of virtually empty malls, housing developments, and even newly built cities. In the eyes of many, far too much equity in China has been invested in real estate. The plain fact of the matter is that when the Chinese real estate bubble bursts it will take huge amounts of equity and credit with it. The question for Forex traders is this. Will a burst Chinese real estate bubble destroy the Yuan? The most profitable currency pair to trade is typically the one that is the most volatile. To the extent that one can trade the Yuan versus the USD or other majors, it may be time to short the Yuan or buy puts on the Yuan with US dollars in Forex options trading.
Trading the Yuan against the USD
From the viewpoint of North Americans and Europeans the Chinese government routinely engages in currency manipulation. They do this in order to keep the value of their currency low which in turn makes their exports more competitive. The virtually continual trade surplus that the country has had against most of the world has allowed them to plow profits back into buying US dollars as well as Euros. This drives the US dollar up and drives the Yuan down. China allows the Yuan to trade against the US dollar and other currencies. However, the People’s Bank of China sets the exchange rate daily and trading is only allowed in a 1% band above and below the set rate.
It Is All about Interest Rates for the Time Being
In an attempt to rein in excessive spending on real estate and get a handle on bad loans, the Chinese central bank has acted to drive up interest rates. Whether or not this will help avoid a real estate crash remains to be seen. However, in the short term it has served to drive the Yuan higher against the US dollar. There is a tendency for foreign currency rates to rise for the nation with higher interest rates. Right now the Yuan is an attractive investment vehicle as interest rates are up and the real estate boom continues. The Yuan currently trades at around 6.12 to one US dollar. The bottom line questions for Forex traders are if the real estate market will cool off and level off or if it will crash. If the latter happens will a burst Chinese real estate bubble destroy the Yuan?