Dollar Loses Luster in China

It isn't just the hedge funds betting against the dollar (WSJ):

...From black marketers to anxious grandmothers, Chinese have become disenchanted with the dollar. The selling has posed problems for Beijing as it tries to keep the yuan pegged to the dollar, adding to pressure China is getting from its trading partners to revalue its currency.

The selling also signals a startling shift that may have damaging implications for the dollar down the line: Many Chinese view the yuan, also called the renminbi, as the safer currency to hold.

"The U.S. dollar is weakening! The renminbi is the hard currency now!" shouts a 40-year old man after pulling $10,000 out of U.S.-dollar-denominated stocks and plunking the sum into yuan deposits. "It's the best choice," he says.

...Meanwhile, China's central bank has scrambled to buy dollars from ordinary Chinese who are selling them, to the tune of $20 billion in the first six months, according to an internal report from the State Administration of Foreign Exchange.

A member of a black-market syndicate in Shanghai, a 35-year old surnamed Lu, says he is doing a booming business converting dollars to yuan... Because Mr. Lu and his colleagues are having a difficult time reselling the dollars, they have lowered their exchange rate below what the banks are offering for the yuan.

..."Hot money," or speculative capital, coming into China is pressuring the yuan. But the return of money through legitimate channels also suggests a rush back to China to bet on a stronger yuan. China's portfolio and other capital inflows stood at $36.3 billion in the first half of the year, a little more than double that of the same period of last year. China's foreign-exchange reserves reached $514.54 billion at the end of September, increasing by about $12 billion a month.

At a closed-door meeting in Shanghai this month, banking regulators expressed concern about these developments. "The exchange rate is facing a lot of upward pressure," said Wang Zili, the deputy director at the central bank's branch in the southern city of Guangzhou, according to the minutes of the meeting. "Foreign reserves are increasing too quickly. A lot of capital is coming in through the black market betting on the yuan."