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PBoC Falls On Yuan Grenade With "Forceful" Overnight Presser
"These comments may give some comfort but it does feel there's a lot more to come on this story over the weeks ahead."
That’s from Deutsche Bank’s Jim Reid and the reference is to a "forceful" PBoC press conference held overnight at which China’s central bank attempted to manage expectations after sparking a panic earlier this week with a "surprise" move to devalue the yuan.
Since then, it’s been carnage in the EM FX markets and every strategist from New York to Beijing has scrambled to figure out the read-through for the Fed in September. What’s fairly obvious to everyone now (and what’s been very clear to us all year), is that China had no choice but to devalue. A string of policy rate cuts hadn’t succeeded in boosting the export-driven economy and keeping the yuan pegged to the strong dollar had led to REER appreciation on the order of 15% in the space of a year.
Between the pace of the three-day plunge and rampant accusations that Beijing entered the global currency wars solely to export China’s deflation and prop up the economy, the PBoC had apparently seen enough. Cue an ad hoc presser.
Here’s Goldman with the summary:
The PBOC press conference held this morning followed the recent sharp sell-off of the RMB as well as heightened market uncertainty about the implications of the reform to the CNY fixing mechanism introduced on August 11. It was attended by Deputy Governor Yi Gang and Assistant Governor Zhang Xiaohui.
The PBOC officials said that the main reasons for the reform are the need to correct the pent-up misalignment of the exchange rate (including from depreciation pressure created by a period of loose liquidity conditions) and the structural goal of transitioning the previous de-facto USD peg to a managed floating rate system. Notably, they did not mention the need to boost growth as a main reason, and also particularly ruled out the need to stimulate exports through a large (10%) depreciation.
Importantly, while the officials said that they would not comment on what the equilibrium exchange rate level is, they said that the misalignment had been about 3%, citing “market survey and analysts’ general estimate” (although it is not known who was covered in the sample), and the roughly 3% depreciation since August 11th has already largely removed this misalignment (it is unclear what the 3% depreciation referred to, but possibly the closing spot rate yesterday vs. the closing spot rate on the 10th). They emphasized that solid fundamentals (e.g., strong trade surplus, abundant FX reserves) would continue to support the currency, and they expected the exchange rate would remain on a broad appreciation path in the future. They reiterated their long-term objective of increasing the market-orientation of the CNY regime.
We think the clearest signal from the statements is that further sharp CNY weakening has become much less likely. While we think they will continue to follow closely the new fixing mechanism (i.e., setting CNY fixing close to the closing spot price of the previous day), the PBOC will now likely start relying more on open FX operations as needed to manage market expectations and curb large depreciation in the near term. The strong policy guidance from today’s press conference, though, may in any case help reduce the need for FX operations for expectation management going forward. Coincidentally, it is interesting to note that the spot exchange rate appreciated suddenly by about 0.5% and converged to the fixing around the beginning of the press conference, although it is not known whether it was a result of PBOC operations or market’s reaction to the PBOC’s statements. We think it is likely that from this point on, the principle of maintaining a broadly stable CNY NEER will be a main (but not the only) factor guiding the USDCNY movement.
Regarding domestic monetary conditions, the officials emphasized that liquidity is ample and interest rates are stable. We think that signals against a major reduction in interbank interest rates. We think, however, broad RRR cuts are still likely, especially as they would be an effective way to replace the liquidity drain related to possible PBOC’s FX operations in recent days (and potentially days ahead).
So in other words, the PBoC will continue to intervene as they did on Wednesday and Thursday in the event the effort to devalue causes the market to become "distorted", and because intervention comes at a cost to liquidity, Beijing will in all likelihood cut RRR for a fourth (and then fifth) time this year.
Below, find a bit of further color on the presser and some commentary on broader implications from Bloomberg and UBS.
From Bloomberg:
The main economic benefit of a weaker yuan is restored competitiveness for exports, a sector that continues to add up to more than 20 percent of GDP. Even so, a large-scale export rebound will happen only with a lag and only if depreciation is more significant than seen in the last few days. Our calculations suggest 10 percent depreciation in China's real effective exchange rate could add 10 percentage points to export growth, with a lag of three months. At its press conference yesterday, the PBOC was dismissive of the idea that this is what it is targeting.
There are also costs to depreciation. Most obvious is the risk of capital flight. Our estimates suggest that 10 percent depreciation against the dollar would risk capital flight of some $400 billion. China's leaders likely calculate that set against their $3.65 trillion foreign exchange stash, that's a risk they can handle. A weaker yuan will also reduce the appeal of domestic assets, potentially dealing a further blow to equities and to the nascent recovery in the real estate sector.
From a UBS Q&A:
Question: Will the weakening of the RMB lead to greater capital outflows from China? Could you give me your view on capital outflows?
Answer: One of the reasons that the authorities don't want the currency to move too fast is that it might generate its own momentum, encouraging capital outflows. I don't think that's something the authorities would want to encourage. So, in other words, the process will be managed so that it doesn't generate significant capital outflows.
I think capital outflows would really depend on the trajectory of currency depreciation. The local A-share market has lost its charm to many domestic investors. It means capital outflows are, I think, kind of inevitable. But massive capital flight could only happen when currency depreciation is very sharp. In such a case, not only will domestic investors convert RMB to foreign currencies, but many global companies will also repatriate their cumulative profits back home. They have operated in China for years but, due to capital account restrictions, usually select to harbor most profits in China. So if – only if RMB depreciates suddenly by 10% or more, would I expect these multinational companies to start repatriating capital.
My guess is that very sharp depreciation, like 10% within one or two quarters, will trigger serious capital flight.
Question: I have a number for capital flow: for every one percentage point of RMB depreciation, the impact on capital outflow would be about $40 billion so I just want to know whether this number is roughly correct. And also, for every 100 basis points RRR cut, what would be the liquidity injection to the domestic market?
Answer: Capital outflow has definitely increased since mid last year, partly driven by expectations of RMB depreciation and one important mechanism of that was the unwinding of foreign exchange liabilities that was built up in the previous episode of strengthening RMB expectations. When everybody was expecting RMB to appreciate, people borrowed from offshore or basically gained FX exposure offshore to bring the liquidity home. A lot of that was short term, trade credit and so on. Now, with expectations changing, this is reversing. But, as of second quarter, this outflow had actually started to stabilize; outflows are no longer that big. So as for your question – how much will this trigger? I don't think you can have a one on one relationship of 1% depreciation leading to $40 billion; that's probably some correlation based on short term data rather than causality.
Directional wise, depreciation could become entrenched if people expect further depreciation, now that could actually facilitate further outflows, even if that took place in just companies paying down their foreign debt more quickly. So that could happen and that's why we say, directional wise, it could tighten domestic liquidity. The Central Bank, of course, can use various liquidity facilities, including RRR cuts, to offset it. A 100 basis point cut in RRR would release liquidity of 1.2–1.3 trillion RMB.
Question: In terms of the export sensitivity, for every 1% of RMB depreciation, what would be the positive uplift for exports?
Answer: On the price elasticity of China's exports – many people have done estimates on that and generally they take it as one on one, meaning that a 10% depreciation leads to a 10% change in export price, that leads to a 10% change in exports. However, it's very much up to the exporters in how much they transmit that exchange rate movement to their pricing. For example, in the past, we have noticed that they don't pass all exchange rate appreciation through into more expensive prices. They pass on only part of it, which means that they actually squeeze their own margins. So in this respect, when China's currency depreciates, they could do something similar to widen their own margins, rather than completely passing on cheaper Chinese export prices to consumers.
On the benchmark – as I said, if Chinese exporters pass on all depreciation effects it could translate into a 1% uplift for exports, but in reality it will probably be more like 0.5%. So a 1% depreciation, could help 0.05% of exports.
Question: Could you actually shed some light on the impact of the weaker Chinese yuan on the prices of commodities, such as coal, natural gas and oil, maybe?
Answer: So on the linkage to commodity prices, I think the biggest driver of commodity prices, of course, are China's demand and their supply situation. That said, I think if the Chinese currency weakens to the extent that demand from other countries for commodities will also weaken, this will be considered as somewhat of a negative.
Question: What will be the impact of the weaker Chinese yuan on domestic interest rates?
Answer: As I mentioned, we don’t think it would inhibit another rate cut. Traditionally people would say that because the Fed is about to raise rates and because its currency is weakening, the Chinese government may not have much room left to cut rates. But in our view, actually, given that: the domestic economy needs help and that the real interest rate level is still very high domestically; the government still retains some control on capital flows; and inflation is still very low -- I think they still have room to cut.
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Wat dei hai ding?
The USSA screaming currency manipulation...Oh wait!...The USSA is screaming into the mirror...F**king hypocrites.
You can't boost your exports no matter what you do if your trading partners are also broke and can't afford to buy your stuff.
HEY ! NO COMMON SENSE ALLOWED
"if your trading partners are also broke and can't afford to buy your stuff."
Except for the US and it's NATO partners, who are required to spend 2% of their GNP on defense (read Lockheed, Raytheon, Grumman and Boeing.)
Schiff thinks the dollar's the problem, not the yuan:
http://www.newsmax.com/Finance/Economy/peter-schiff-dollar-china-economy...
Schiff is most likely correct. Goldman pointing the finger at the PBOC? That is a laugh!
Goldman has all their fingers up the asses of so many puppets around the world I wonder where they got one to point.
It's amazing to see how the actions of the U.S.S.A fed can fuck up the rest of the world.
Didn't the rest of the world choose fiat? They didn't have to did they?
Didn't the rest of the world choose fiat? They didn't have to did they?
The rest of the world was coerced into using the US Dollar at Breton Woods by the M/I Complex in the USA - which at the time had by far the most powerful war machine in the world and was also the sole owner of working atomic bombs (albeit for a short time). Also, in 1971 I really don't think Nixon asked everyone else in the world if it was o.k. for the USA to disconnect the dollar from gold and go to an essentially pure fiat currency.
Yes, but what about their own currencies. Could have chosen gold/gold-backing over printing own fiat, no? Also, could have chosen not to adopt fractional reserve banking, no? Everybody wants a free lunch. Everybody kneels before Mammon.
How does it go Cry me a River? or What Goes Around...Comes Around.... Asian markets spooked!
https://www.youtube.com/watch?v=TOrnUquxtwA
Putin is awfully quiet about all of this. Makes you wonder when the polonium tipped umbrellas are going to start coming out of the closet and start poking some people.
If memory serves, the umbrella was a delivery system for a palladium pellet laced with ricin.
It was the tea that got the polonium.
Let's cut to the chase.
It is all the U.S.S.A.'s fault.
They work hard to make us all use their crap-fiat Dollar as reserve currency (TRUE).
They export inflation to us when they print money or mark interest rates too low. (TRUE).
They export deflation to us when the Dollar appreciates. (TRUE AND FALSE...appreciating Dollars cause deflation elsewhere...but non-us policy also has a HUGE vote in whether the Dollar will appreciate vs local currency)
They force us to have fiat currencies of our own rather than commodity currencies (FALSE...Saudi Riyals and Russian Roubles are de facto commodity currencies).
They force us to wildly expand credit leading to bubbles in our own economies. (FALSE...did that all on your own...yes, yes, oligarch bankers encouraged you do to it so they could move all their good assets to you, and then crash the US 'bad bank'...but you chose to do it).
Build ur own army... just saying
Huh?
Don't understand what you mean.
I was addressing the inherent double-standard in all the "It's 100% the U.S.S.A's fault" posts by pointing out that there's two sides to even that coin.
If they want to blame the US for exporting inflation and deflation, then they also have to take responsibility for their own deflation and inflation...and they don't.
I just don't want to be on a nationalist 'team'.
Given people's unconditional support they will all be equally corrupt. Because that is human nature.
I don't want my support to be unconditional.
http://tinyurl.com/ndn8hgd
If it's simple for China to increase their exports by devaluing their currency why doesn't the US consider devaluing its currency and go from a seemingly undending trade deficit to a trade surplus?
God forbid we might even onshore some of our lost manufacturing base and sell stuff to the rest of the world intead of soaking up all of their excess capacity.
Hey we can do the trade (e.g. currency) war rumble too.
Son to father: How much is a dollar worth?
Father to son: Well it depends.
Son to father: Depends on what?
Father to son: Depends on what we want it to be worth.
Son to father: That doesn't make any sense.
Father to son: Regardless, that's the way it is - so man up.
Son to father: Hum?
The bankster's would love to do that, in principle.
It is called Mercantilism.
The problem is that the Dollar is the Reserve currency. While it is, they simply CAN'T improve the trade balance...because of all the exported dollars printed for the purpose of being exported. It makes the result into exported inflation (or in contraction - deflation).
This is why no human-made currency should be the reserve. To be neutral, it must be natural.
And while there are many candidates...we already know which one has historically worked best.
Well - I guess another view is that dollars are cheap to create and if the rest of the world thinks they are worth a lot (and they need those exported dollars) then maybe we should probably just go with that and trade those easily (magically) created dollars for stuff the rest of the world produces and for the services they provide. (In some ways this does seem preferable to actually producing and selling things and services ourselves - which does involve a lot of work and effort - as well as involving risk of failure and loss.)
Come to think of it, since I have quite a few dollars it's probably better for me if the dollar remains strong (or even strengthens). What was I thinking?
From Goldman Sucks - We think the clearest signal from the statements [made by the PBOC] is that further sharp CNY weakening has become much less likely.
Rule of thumb #1 - Whenever a "too big to fail" bank makes a statement like this they often (ahem, almost always) will act in a completely opposite manner - therefore, so should everyone else. For an example see the recent 7.1 mt purchase of PHYSICAL GOLD by this same firm (along with HSBC) while at the same time they are screaming to the rafters publicly about the worthlessness of gold as an asset/investment. . . .
Confusius say: "What go up must come down."
The news is not that the chinese devalued incrementaly (unless you are YX).
The news is what underlies the devaluing - global devaluing caused by global train wreck still dealing with last cris while preparing to enter the next.
If only we had listened to Dr K (nobel laureat economist)!?
Indeed
Tyler could you remind us what the Geneva Convention on Currency Wars says about exporting deflation?
Is it anything like exporting subprime mortgage backed securities?