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This Yahoo Finance article shows that major macroeconomic currents are often very misunderstood, even by supposed “experts.” The author argues that China’s new move to increase currency exchange flexibility means that the odds of a “hard landing” for their economy have virtually decreased to zero. This is a very basic misunderstanding of the situation.

Expanding the trading range of the Yuan is actually what one would expect if China faced a “hard landing”. If the Yuan’s intrinsic value depreciates, but the peg remains in place, China will be forced to default on their debts. This is EXACTLY how the Asian Financial Crisis of 1997 began; Thailand was forced to float the Thai baht in order to avoid insolvency.

So the author’s assertion that greater exchange rate flexibility means China is confident about long-term growth makes little sense. If anything, this might be an indication that Chinese policymakers realize that they are going to have to devalue the Yuan as a result of a crashing fixed asset bubble.

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