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Is China Quietly Targeting A 20% Devaluation?
When China took the "surprising" (to anyone who was naive enough to think that the country’s economy isn’t in absolute free fall) step of resorting to a dramatic yuan devaluation on the heels of multiple ineffectual policy rate cuts, Beijing pitched the move as a "one-off" effort to erase a ~3% persistent dislocation in the market.
Seeing the effort for what it most certainly was - a tacit admission of underlying economic malaise and a last ditch effort to rescue the export-driven economy via an epic beggar thy neighbor along with the whole damn EM neighborhood competitive devaluation - analysts were quick to note that the PBoC may ultimately be targeting a 10% or more depreciation in order to provide a sufficient boost to exports.
Well, official protestations to the contrary, it appears as though even some Party agencies are assuming a much weaker yuan both over the near- and medium-term. Here’s Bloomberg:
Some Chinese agencies involved in economic affairs have begun to assume in their research that the yuan will weaken to 7 to the dollar by the end of the year, said people familiar with the matter.
The research further factors in the yuan falling to 8 to the dollar by the end of 2016, according to the people, who asked not to be identified because the studies haven’t been made public.
Those projections -- which suggest a depreciation of more than 8 percent by Dec. 31 and about 20 percent by the end of 2016 -- were adopted after the currency was devalued this month and compare with analysts’ forecasts for the yuan to reach 6.5 to the dollar by the end of this year.
While the rate used in the research isn’t a government target, it suggests China may allow the yuan to fall further after a depreciation in which the currency was allowed to weaken by nearly three percent on Aug. 11 and 12. The yuan weakened for a second day in Shanghai to 6.4124.
“It wouldn’t be totally unreasonable for China to allow a weakening like this,” said Zhou Hao, an economist at Commerzbank AG in Singapore, referring to the 7 level against the dollar at the end of this year. “A certain level of depreciation can be accepted according to China’s international payments situation, but it may bring unforeseeable pressure on foreign debt repayments and capital outflows.”
The rate used in the research constitutes reference levels used for economic assessments and projections, according to the people. The PBOC didn’t respond to a fax seeking comment.
A dollar-yuan rate of 7 would be a more than 8 percent depreciation from Tuesday’s level. At an Aug. 13 briefing on the yuan, PBOC Deputy Governor Yi Gang dismissed the idea that China would devalue the yuan by 10 percent to boost exports, calling it “nonsense.”
Yes, "nonsense", just like how Chinese QE "doesn't exist" despite the fact that untold billions in stocks have been transferred from CSF to the sovereign wealth fund just so the PBoC can continue to insist that its balance sheet isn't expanding.
In any event, a more dramatic devaluation may ultimately be necessary not only to boost exports, but to alleviate the necessity of interveing constantly to arrest the yuan's slide. As BNP's Mole Hau put it in a note out Monday, "what appears to have happened is that, whereas the daily fix was previously used to fix the spot rate, the PBoC now seemingly fixes the spot rate to determine the daily fix, [thus] the role of the market in determining the exchange rate has, if anything, been reduced in the short term." Which explains why the FX reserve drain may well be continuing unabated causing the massive liquidity crunch that's forced the PBoC to inject hundreds of billions of liquidity via reverse repos and ultimately forced today's RRR cut.
Of couse as we said earlier today, "while global markets received China's announcement with their typical 'a central bank just came to our rescue' exuberance, the reality is that as least today's RRR cut will have zero impact on spurring aggregate demand, and is merely a delayed response to FX interventions that have already taken place [which means] for China to net ease, it will have to do more, much more [but] ironically, doing so, will merely accelerate the capital outflows as a result of the ongoing plunge in the CNY, which leads to the circular logic of China's intervention ... the more it intervenes in an attempt to stabilize every aspect of its economy and finance, the more it will have to intervene, until either it wins, or something snaps."
Ultimately, that "something" may end up being the daily yuan management effort because the intervention game is getting expensive and incremental easing will only make it more so.
A free float may be the better option and if the passages excerpted above from Bloomberg are any indication, the yuan is going to be much, much lower by the end of next year one way or another. The only question is how much pain China incurs on the way there. We'll close with the following quote from SocGen:
If the PBoC wants to stabilise currency expectations for good, there are only two ways to achieve this: complete FX flexibility or zero FX flexibility. At present, the latter is also increasingly unviable, since the capital account is much more open. Therefore, the PBoC has merely to keep selling FX reserves until it lets go.
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Repatriated Dollars converted into Yuan provide liquidity for Chinese markets, why not leverage that?
Why not buy more gold with that?
Im sure they are.
Welcome to the China-led currency war
http://www.planbeconomics.com/2014/03/john-rubino-is-chinese-currency-wa...
Or targeting a gold currency during a global currency crisis?
http://jessescrossroadscafe.blogspot.ca/2015/08/china-on-track-for-record-year-for-gold.html
Naaah.
We've all seen the havoc caused by Chinese devaluation so far. They are going to be doing over the next 16 months.
Who going to stop them? Obama? Lindsey Graham? Yo mama?
They are and they have no interest in being the "official" reserve currency. They are happy so long as people keep trading with them. Once trade with china stops, then you can sweat.
silver will never catch a bid again ever ever never
Gee, dunno, because every direction you look there are naught but imploding stim-u-less ghost corporations and margin calls?
What do you think they are JAPAN?!
currency war is in full swing... do not get stuck holding cash! by the time you are done covering it with dirt in your back yard, it'll be worth less than what it was when you dug the hole
What do you suggest?
shiny things
Shiny things are tied to the central banks. If paper goes worthless those shiny things go with it.
They're the only money NOT tied to central banks
Nope. What broke guy is going to trade you gold or silver in the streets when they've lost everything and can afford nothing.
Can you go to the store now and use gold / silver? No. You have to trade it for paper first. See the problem?
Answer: NONE, Broke guy obviously doesnt have any gold to trade otherwise he would.
Time for your re education. This says it best.
https://www.youtube.com/watch?v=Jt15F21jpN8
.1 gram per loaf of bread
I can't wait for you to be starving in the streets, endlessly confused why all these fat, healthy people with homes and property who walk by you flipping silver coins managed not to lose everything they had.
I'm saving mine for when it won't even buy toilet paper. Also I like the pretty pictures.
Is every central bank targeting a 20% devaluation?
:)
I think 20% devaluation is targeting the central banks. Here comes the Deflation Boogy Man !
Thanks for playing 20 percent deflation would be a 20 percent appreciation in a currency.
The Deflation Boogy Man is causing the banks to consider 20% devaluation. It's called priming the pump. I get it. But thanks for playing.
The G7 are engaged in a heated craps game to determine who will devalue by how much and when right now.
Just a reminder
Remarks by Governor Ben Shalom Bernanke
Before the National Economists Club, Washington, D.C.
November 21, 2002
"Although a policy of intervening to affect the exchange value of the dollar is nowhere on the horizon today, it’s worth noting that there have been times when exchange rate policy has been an effective weapon against deflation. A striking example from U.S. history is Franklin Roosevelt’s 40 percent devaluation of the dollar against gold in 1933-34, enforced by a program of gold purchases and domestic money creation. The devaluation and the rapid increase in money supply it permitted ended the U.S. deflation remarkably quickly. Indeed, consumer price inflation in the United States, year on year, went from -10.3 percent in 1932 to -5.1 percent in 1933 to 3.4 percent in 1934.17 The economy grew strongly, and by the way, 1934 was one of the best years of the century for the stock market. If nothing else, the episode illustrates that monetary actions can have powerful effects on the economy, even when the nominal interest rate is at or near zero, as was the case at the time of Roosevelt’s devaluation"
I dunno, ya think they are planning to devalue the dollar
LOL! This is not the 1930s. They are lying about the real inflation numbers. Go ahead, pull a "Roosevelt", I triple dog dare you.
Aye, nothing like a command economy.
Race to the bottom is well under way (currency wars).
The Doom Wrecking Ball is gathering speed as well....
I heard the Iraqi dinar is going to be a safe haven soon.
;)
I prefer the ISIS gold coin.
wow think of all the cheap plastic crap you will be able to afford at 20% devaluation! Happy Days are here again!.....oh wait....
I guess the PBoC is expecting the Fed. to start QE-4 ASAP, so they can mop up all the UST they're[PBoC] going to sell to deval. the Yuan.
Could very well be. Always wondered what would happen when the Chinese start dumping USTs, guess this forces their hand.
Whatever happens, it's going to be fucking hilarious.
Normally the PBoC would be buying UST. [selling yuan and buying usd] to keep yuan cheap vs $usd.
This time I think the outflows from Chinese markets are going to be so substancial with a devaluation like that, that the PBoC will be forced to sell UST in order to provide liquidity in place of those outflows.
Who knows, maybe the PBoC will do another massive QE, but I still don't think they have any real appetite for huge UST buying.
It will be interesting to see what China does, and I agree we're going to have fun watching it all happen.
I dont know the FX world in any sort of the same realm as you do. But I do know this, an 4-8% deval is jack. mild inflation will get that in a year. If you are at that point most countries seem to like the 40-50% whammy. Something with some bite to it. Do I think they are done? Nope, I think it will be a series of mini-bursts and if not ,perhaps it was a warning shot across the bow of sorts
but but but the Petro Yuan..... /s
Planet Earth will likely be devalued by 20% in the coming months. Fitch have forecast a rating downgrade from 'mostly harmless' to 'harmless' by the first half of 2016.
Earth is currently running at 1200% debt to GDP (actually true).
Yeah, it's very easy to complain about consumer, corporate, and sovereign debt separately without taking in the entire vista of stupid they form together.
Glad I'm in the black. ;)
If this goes really wrong, being in the black may cause you to be investigated for suspicious behavior. WINK
Isn't "mark to fantasy" accounting great...
When I go to the bank I pretend its run by goblins like Gringotts Wizarding Bank. Makes me feel substancially stupid enough with my peers to continue to go along with this freak show without calling bullshit too loudly.
I'm about to panic buy!
Just another way of telling Chinese housewives to buy gold.
They do love the number 8. Very "lucky" Chinese number.
Will they make even more ridiculously craptastic products to compensate?
I'm colorblind, but presumably those shoots I see sprouting up everywhere are green.
Meanwhile, reality has hit. No one wants to buy a thing or no longer can. Get ready for limit down or the CBs to start trading stocks to themselves on both bid and ask sides to make believe it some more.
The Blowhorn is doing another one of it's special Infomercials right now. I had to turn it.
Anyone that suggests the markets are oversold because they're trading under the 200 day avg., and suggests people should buy stocks, deserves to be shot in the head.
These idiots should look at the weekly and monthly charts.
I miss cdad. He coined the term the BlowHorn here at ZH.
And youre right YC, fear and caution hasnt even begun to register with those idiots. It will take another 4 or 5 thousand points off the Dow before they grudgingly admit that they have no fuckan clue what is actually going on.
Isn't cdad still around BOP? Yeah,he's a good guy.
We should take a collection and buy the cast of CNBS a set of machetes to juggle while they're making their trade recommendations on the air. :-D
I tried to look him up but his comments are all gone.
Another old ZH vet who has ridden off into the sunset.
That sucks.Thanks for checking.
Whatever happened to Ghordious? He would show up to comment on any story concerning Greece. Greece has fallen completely off the ZH radar lately, so maybe that's why we haven't seen him.
Why would they want to look at any meaningful information. It would just hurt the sincere deliver of their propaganda.
Family Law is simply the leading edge of martial law, which is now explicitly and implicitly embedded in all employee tracking systems. As the most hunted man in America, I know what is going to happen before it happens because I can see the leading edge and extrapolate backwards in time, the direction of empire. The State will continue kidnapping kids for the purpose of extortion until it can’t, when it can no longer sell its bonds for the purpose, so that is exactly what is going to occur. Healthcare is a government selective breeding program, supplemented by immigration, and the financial system is crashing because the demographic Ponzi supporting it is crashing, globally, which is why it appears to be a slow moving train wreck, until it hits threshold.
Trump just sees what’s coming for real estate inflation relative to wage gain, quantum reversal, and he wants to protect his holdings. Even if he made $10B as president, he would be worth it, if he could just fix something, but don’t hold your breathe. He’s talking about jobs, for the middle class, to rebuild his buffer, not firing all the healthcare make-workers following Margaret Sanger, another bait and swap, all the critters know. Family Law is simply the modern Scarlet A, hidden behind layers of computer programs, a prototype to be applied to everyone, until no one, in the empire, is free to choose. Choosing the color of an i-phone, Samsung or Apple, the latest means of martial law, majority peer pressure, is not choice.
The critters just took my fourth baby girl; I don’t need a roadmap, or a lawyer, to see what’s coming. China is just another extension, backwards, into its own recursive loop, accelerating discovery.
Trump is an egotistical blowhard who will promise you whatever you want to hear.
No, that's Obama.
Trump actually says things that make sense, instead of hopey changey unicorn farts and rainbow bridges will fix everything.....ObamaClown, huh?
But at least he uses politically un-correct language. That has to be worth something.
No different than any other idiot out there.
all energy[?]'s have their epicenter focused on china
iran, kazakhstan, turkmenistan, azerbaijan, iraq, qatar [via lng shipment?], and now saudi arabia with its fingers up its ass, swollowing[choking] really hard... for yuan`sake only to find out that 'mother russia' is A'OK with Xi!
china knows all to well what Afpak was all about with xinjiang`uyghur's muslim jihadist and sa financing covertly via kashmir/india
saudi arabia [sa] is about to pay a dear price for '911???
It's funny but not too long ago, people were screaming that the Chinese were keeping their currency artificially low.
They were keeping it low. Anyone who does not float their currency is actually fixing the game. The game is Japanese style mercantilism which requires a weak currency. It keeps your people poorer but it gives you the edge in making artificially cheap garbage.
[Mario Draghi crying hysterically and Shinzo Abe shitting himself.]
Mario shat his pants when he heard about this.
Imagine these boys trying to persuade the Chinks not to devalue? They'd be sent packing pronto, Mario.
If the Chinese do this it's the beginning of the end - Greece will be forced out of the Euro in order to get it
to devalue, the ECB will ramp up QE, as will the Japs & the US Fed. Thereafter comes systemic financial collapse,
the bankruptcy of the US, UK, France, Italy, Spain, Portugal, etc, the loss of reserve currency status for the USD,
the collapse of the Euro and the EU and the return to the Punt. You'll be glad then that Irish farmers are
able to produce enough food to feed 50 million.
I hope you boys are prepared to "clean house" by the way. From what I hear it's been getting increasingly dirty
of late. I thought you would have learnt from your experiences of the Six Counties but, as they say, "The only
thing history teaches us is that men learn nothing from history."
Stick your QE up yer hole.
If 20% devaluation is a runner, then the not so covert currency war will be bare for all to see (those that are capable of seeing, that is).
I wonder how the lads at the SNB are digesting this news? Heck if this comes to pass Germany can kiss their Chinese export market goodbye.
There's no QE4. They know it won't help.
There isn't going to be QE4. They know it won't work and won't try. We will eat cake this time.
there will be a QE 4, it will be packed differently, it will be a cash for clunkers, it will be free homes for illegals, you know for the chiltren
I don't know he answer, so I'll ask a question of my own.
Would China want to devalue it's currency before the Yuan becomes a reserve currency in October?
one of your two premises is false. we know China is devaluing so.......
Okay, so I just read some articles about the IMF decision to delay any announcement about making the Yuan a reserve currency for anothe rnine months.
So what China is doing now is giving a big middle finger to the IMF/US. Same thing.
"I see" said the blind man to his deaf daughter...
the japanese devalued 50% over fours years so if they stop at 20% it would surprise me.
$1 trillion have been wiped off Chinese equity valuations in the last 4 sessions.
Ouch.
Where is the best (reliable) vendor to purchase 1/10 oz coins? Premiums are all over the place.
Did we really expect the Chinese to do the FED's bidding?
The FED got in to this mess, surely they can get US out of it...
It's probably time we start compiling a list of phrases to use when it hits the fan. I don't want to sound too informed.
They can try, but eventually they'll have to let the yuan float.
Go for 100%!
Go for 200%!
I certainly hope they are targetting 20%,
Come on, get this this thing done allready. Aussie Dollar down to $1,600 to the OUNCE of shiny. Waiting for $20,000 Count in PET PAPER weigh in PET ROCKS _JOHNLGALT
The Chinese thoroughly believe in the Japanese model of mercantilism. You grow through exports. The idea is to import raw materials and then turn them into much more profitable manufactured goods to send abroad. The managed currency also goes along with very high tariffs. By devaluing the currency you improve your odds of being the biggest low cost producer and you simultaneously increase the tariff on imports (through devaluation of home currency) without actually changing the percentages.
China looks to be in for an extremely bumpy ride as a lot more investors question the risk of holding yuan assets. The general consensus held by everyone from deposit holders in Hong Kong to high-yield-bond investors in Europe was that growth would continue. Money flowing into China over the years has pushed along the misallocation of credit on a grand scale and continued the build-up of bad assets in the banking sector.
An estimate by Goldman Sachs has indicated China might be facing credit losses of as much as $3 trillion as defaults ensue from the expansion of the past four years. Nomura claims $90 billion left the country in July with the pace accelerating since the People's Bank Of China shocked the world by ditching its currency peg to the U.S. dollar. Capital flight for the first three weeks of August may be approaching $100 billion despite the use of harsh anti-terrorism and money-laundering laws to curb illicit flows. The article below looks deeper into this shift and its implications.
http://brucewilds.blogspot.com/2015/08/chinas-massive-capital-outflows.html
What's up with the Yuan? Does not matter as long as the ordinary people suffer all the financial shenanigans.
Here an excerpt from:
REVERSE CHINA SYNDROME: A VIEW FROM ABOVE.
https://contrarianopinion.wordpress.com/economy-update/
So true, that is exactly what is going on and is going to happen.