Is The Currency War Over? China Revalues Yuan 0.05% Stronger

Tyler Durden's picture

Heading into the China session, offshore Yuan signaled a 1% devaluation was on the cards. Of course, all media eyes were focused on the disaster in Tianjin but after 3 days of what was supposed to a 'one-off' adjustment, The PBOC has in fact surprised with a modestly stronger fix at 6.3975 from yesterday's 6.4010 Fix. That leaves the CNY Fix devaluation to a 4.60% loss in 4 day. Of course, its a bit hypocritical of Americans or Europeans to regard the Chinese as mean and nasty and currency warriors because they're letting their currency adjust against a constantly-devaluing dollar and euro. The US has been devaluing the dollar for years, but that's a-ok for Wesrern commentators, apparently. It appears - judging by the opening devaluation and closing intervention - that China is as set on crushing the herd of one-way carry traders as any export-enhancing currency debasement.

  • *CHINA SETS YUAN REFERENCE RATE AT 6.3975 AGAINST U.S. DOLLAR
  • *PBOC YUAN REFERENCE RATE STRENGTHENS 0.05%

Offshore Yuan signalled some further devaluation was coming... no matter how much The PBOC denies its 10% goal...

 

Note the last 2 days have seen intervention at the close of the day - shaking out as many carry traders as possible...

 

Chinese stock futures are rising modestly after the week-long drift lower..

*  *  *

Finally, here is an interesting Austrian perspective on why China devalued the Yuan (via The Menger Center's Paul-Martin Foss),

Taking a look at this chart of the Dollar/Yuan exchange rate, you can understand why the Chinese government took the action that it did. The chart is denominated in yuan to dollars. The more yuan per dollar, the weaker the yuan and the stronger the dollar; the fewer yuan per dollar, the stronger the yuan and the weaker the dollar. You can see that the yuan has been continuously strengthening over the past ten years. Remember that as a currency strengthens, exports from that country become more expensive. A good that cost 100 yuan back in 2005 would mean a dollar cost of a little over $12. A 100-yuan good today would cost over $16. That’s why the Chinese government originally tried to keep the yuan pegged to the dollar, so as not to make the exports it relied upon for economic growth more expensive abroad. But after much pressure from the US and other Western countries, the government depegged the yuan, allowing it to trade in a narrow band and appreciate against the dollar.

 

 

Remember the dynamic that was going on, too. Chinese firms would export to the United States. US importers would pay Chinese firms in dollars. Those dollars would come back to China, where the exporters wanted to change them into yuan. Now what to do with all those dollars? Well, the Chinese government used them to purchase US Treasury bonds. Of course, the US wanted to take advantage of this, so the Federal Reserve created even more money out of thin air, increasing the money supply, with more and more of those dollars going overseas to purchase Chinese goods. And then the Chinese government would soak up more of the US government’s debt. Cheap goods and our debt is covered? That’s a win-win in any government’s book.

 

Take a look at the chart of the M2 money supply, the broadest money supply measure the Fed still publishes.

 

 

As the M2 money supply increases (devaluing the dollar), it seems that the yuan strengthens against the dollar. If you look at the actual data behind these charts, there’s a -0.91 correlation between M2 and the yuan/dollar exchange rate over the past 10 years. If you strip out the new pegging period from mid-2008 to mid-2010, there’s a -0.96 correlation from mid-2005 to mid-2008, and a -0.85 correlation from mid-2010 to today, which rises again to -0.96 if you remove the data from the interventionist period beginning in early 2014. Yes, correlation doesn’t equal causation, but these numbers aren’t mere coincidence. The US government wanted to take full advantage of the dollar’s position as the world’s reserve currency, exporting dollars to China in exchange for cheap consumer goods, while simultaneously making US exports of capital-intensive goods to China cheaper.

 

Any American reactions to China’s devaluation moves must be seen as hypocritical. Just as the US government took advantage of the Bretton Woods system to print more dollars than it had gold, it has engaged in a similar beggar-thy-neighbor policy with respect to China, exporting devaluing dollars to China in exchange for Chinese-made goods. It is perfectly understandable that China would rather not have its monetary policy guided by decisions made in Washington. All the hand-wringing in Washington is just for show. American politicians wanted to enjoy the benefits of inflation, getting something for nothing, and they don’t want it to stop. So they try to paint China as the bad guy for reacting to loose American monetary policy. It goes without saying that none of this would be an issue if we could just get government out of the money creation business. But that’s a story for another day.

*  *  *

As The Mises Institute's Ryan McMaken sums up:

China has devalued the Yuan for the third day in a row. For many, this has aroused fears of a currency war. But, its a bit hypocritical of Americans or Europeans to regard the Chinese as mean and nasty and currency warriors because they're letting their currency adjust against a constantly-devaluing dollar and euro. The US has been devaluing the dollar for years, but that's a-ok for Western commetators, apparently. Now, as Frank Hollenbeck has pointed out, devaluing the currency to favor exporters is a bad idea, but that's nevertheless what Europe, the US, and Japan have been doing for years - unofficially. The fact that China is now trying to get in on the game is just the expected outcome of the current global monetary race to the bottom...

* * *

So China rattled its monetary sabre... wobbled a few EMs, crushed European carry trades, and flexed its muscles by not turning up at today's 30Y auction in the US... message sent loud and clear?!

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nmewn's picture

Well thank Confucius that's over, whew, I was really getting scared, 0.05%!

Courageously strong move there ;-)

JC-BI's picture
JC-BI (not verified) nmewn Aug 13, 2015 9:39 PM

It's NOT over. It's a game of chess. America sent them a message with the bombing. They devalued the Yuan then reevaluated it slightly upward to con the bombers.

https://biblicisminstitute.wordpress.com/news-with-views/

nmewn's picture

What bombing was that?

I Eat Your Dingos's picture

The one no one can confirm...the imaginary kind of bombing

Bloppy's picture

China is losing its grip on central planning and things are going awry quickly. A day or two of calm means nothing.

 

Boston Globe: ‘A day at the beach for the Obamas’

Alexandre Stavisky's picture

A little creative destruction.  A central plank of command-and-control-central planning, er, free and efficient markets of daily renewed price discovery.  You may dally a bit and tamper with the Jedi philosophy, this may be overlooked even forgiven.  But take even the smallest step toward an independent move and feel the wrath.

Just an observation.  We all know by long experience and observation that impossible coincidences often occur together.

Greater East Asia Coprosperity Sphere (no, that failed, right?), I meant the East Indies Tea and Coffee Cooperative Mercantile invite you for a simple cuppa and small talk.  Please resist the urge to demure.  Our arsenal stands ready and subordinate to our wealth product and storehouse of riches.  Don't provoke another demonstration of our displeasure.

I Eat Your Dingos's picture

Oh gosh please don't say the mushroom cloud in China yesterday was a first strike by USA supporter Fifth Columnists to undermine an economically important city or along those lines?

DIgnified's picture

I'm not inclined to believe so, but you can find articles online from the past year stating that they were building a new financial center there. 

Rusty Shorts's picture

 - Dr Sheng Kuo

August 13,2015

CHINA - As a highly trained and esteemed scientists, I can say with little doubt, and in complete collusion with any number of other scientists that matter, what you witnessed, was a rarely seen phenomenon, known as RLINS, or random lights in night sky. We're not sure what causes the apparitions to occur, but to calm any nerves over such sightings, know that it is rare, but completely natural. There now, that should settle it.

 

 


Roving reporter's picture

The Tianjin Message was received.

eduard khil's picture

Wi tu hai
Wi tu hai
Wi tu hai
Wi tu loh

ebworthen's picture

0.05%?  Sounds like "baffle 'em with bullshit" to me.

They've watched too many FED press conferences.

NDXTrader's picture

We'll see how long that lasts, might be at 8 before things really get warm

joego1's picture

Gobmint debt is guaranteed by the full credit and faith of the taxpayers and this taxpayer plans on dying before they get ($.0000000000000001 to the minus 1 trillion power and 00/100 sense) of the debt from me.

NDXTrader's picture

And futures jump...but I thought futures jumped because devaluation might set off more QE. Sometimes I forget why futures jump - but then I remember US stock futures always jump and we "figure out" why later

I Eat Your Dingos's picture

FUTURE NEWS HEADLINES: Obama declares China as the worst currency manipulator ever!

Obama calls a Nato meeting to deal with this act of war. Nuclear first strike is on the table.

 

J Mahoney's picture

A little bit of an overreaction? Obama will do nothing--too much Chinese campaign money goes to Democrats. I wish he would do away with the Post Office Asian E Packet which costs Asian vendors $1.00 to send stuff that would cost a USA vendor $15.00.  CHARGE THEM THE SAME AMOUNT AS THEY CHARGE US BARACK--REGARDLESS OF WHAT AMAZON AND EBAY TELL YOU TO DO

me or you's picture

I don't think US has anything to do with the in Tianjin remember China know the whereabouts of every US government agent (spies) in China territory and beyond. China could've lost 44+ people in that explosion but how many US spies have been killed since then or after?

roddy6667's picture

The whole cycle of China selling goods to US, US paying in dollars, China using dollars to buy Treasury paper was one huge carry trade. America printed money to pay China, devaluing the USD and raiising the RMB. China wins, America loses.

Later China very discreetly uses the paper of decaying value to buy gold and other non-perishable commodities. China wins later.

JOHNLGALT's picture
JOHNLGALT (not verified) Aug 13, 2015 11:11 PM

So it's O.K. for the U.S. Japan, the E.U. to devalue their currencies, but not CHINA?  JOHNLGALT

kedi's picture

Of course these rapidfire repeggings were completely secret. Nobody made any fast profits. I'd keep an eye on high level officials suddenly emmigrating with bulging suitcases. Any Goldman Sachs alumni in the Chinese government economic positions?

JOHNLGALT's picture
JOHNLGALT (not verified) Aug 13, 2015 11:19 PM

I'm sure glad I've got my  PET ROCKS to look at. Anyone who is still holding  PET PAPER will get what they deserve for supporting the WORLD WIDE PONZI PAPER SCHEME (WWPPS) designed to enslave billions of people.  JOHNLGALT

 

roddy6667's picture

It's silly to call this a "currency war" In the first 120 days of last year, China devalued the RMB about 3.6%, or 21 cents. The wheels did not fall off the Chinese economy. Or anybody else's.

 

bid the soldiers shoot's picture

The next stage

Chinese firms would export to the United States. US importers would pay Chinese firms in dollars. Those dollars would come back to China, where the exporters wanted to change them into yuan. Now what to do with all those dollars? Well, the Chinese government used them to purchase US Treasury bonds.

 

 Of course, the US wanted to take advantage of this, so the Federal Reserve created even more money out of thin air, increasing the money supply, with more and more of those dollars going overseas to purchase Chinese goods. And then the Chinese government would soak up more of the US government’s debt. 

The only way to avoid soaking up more and more of American debt, would be for China not to sell its  goods for USD.  

China could insist on its exporters selling against letters of credit drawn up payable in euros, pounds or YUAN.

The problem with yuan is the the enormous upward pressure it would place on China's currency.  When foreign importers had to buy yuan to pay for their imports. While the PBOC wanted a weak yuan.

What to do then?

Take a tip from Bernanke's Fed and start printing yuan like grains of rice.  Then there will always be a large supply of yuan on the fx to cover whatever the demands of a busy Christmas are.

And what cetral banker is there alive who would have the chutzpah to complain about the PBOC printing yuan?

hedgiex's picture

A mercantilist export oriented economy aided by undervalued currency model has hit the walls. Foreign reserves earned are depleting in value on from the currency pumps  of US/Euro Central Banks. Is China expected not to react ? Yes a currency war but who started it ? Just a reset to the conditions of the global economy where the race is towards the lowest common denominator.

Rock On Roger's picture

It appears americans are not welcome in Tianjin.

 

https://www.youtube.com/watch?v=CORCjv_iw6o

 

 

Sorry_about_Dresden's picture

What would you expect!!! At least they didn't get maced.

You can't do that here! Look at OWS. You weren't even allowed to assemble.

Does anything indicate it will be any different there?

You just don't do that kind of stuff over there. They should have gone through proper channels. Paid the correct official. 

There is a rule I learned in China:

You can do just about anything as long as you don't talk about it. (except deal dope and drive drunk; they will crucify you if you do). The exact opposite here where, sometimes, you can say what you think as long as you don't do what you think. Not as much these days.

Dr. Engali's picture

Anybody else find the timing of Tianjin a bit suspicious? China does a surprise devaluation, and then follows it up with a second. In the meantime a Wharehouse in Tianjin blows up and the next thing you know China is holding a press conference proclaiming that they won't continue to devalue the yuan.

roddy6667's picture

I live in Qingdao. Last year we had an explosion in the Huangdao district that killed more people. Leaky pipeline. A lot less press coverage. In China, shit happens. No reason necessary.

Bunga Bunga's picture

They ran ou tof ink. It got all destroyed in a big explosion.

The Duke of New York A No.1's picture

Nobody phucks with Larry Silverstien.

Caught_Fish's picture

Didn't this just devalue all those currency swaps?

falak pema's picture

Thank u for putting the picture right.

FED QE and Draghi doing whatever it takes makes the Oligarchy carry trade a ONE WAY game.

CHina has shown the world two can play it !

Apostate2's picture

This is just a central planning fix. Make the newly ordained system work. Just wait. I suspect things may be unraveling soon.