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"What If China Devalues To 8?" BofA Warns Of "Profound" Consequences For Commodities, Financial System

Tyler Durden's picture




 

Last week, in “Is China Quietly Targeting A 20% Devaluation,” we highlighted a Bloomberg piece which suggested that “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 [and to] 8 by the end of 2016.” 

Given China’s, how should we put this, “aggressive persecution” of anyone deemed to be spreading “false” information about the country’s financial markets, it’s quite understandable that Bloomberg’s sources asked to remain anonymous, but even if we don’t know the specifics, targeting a 20% devaluation by the end of 2016 would seem to be consistent with an all-out effort to give the export-driven economy a defibrillator shock, as every 10% devaluation translates roughly to a 10 point boost to export growth. 

We also said the following about why a more dramatic devaluation may indeed be in the cards:

In any event, a more dramatic devaluation may ultimately be necessary not only to boost exports, but to alleviate the necessity of intervening 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.  

Needless to say, China’s devaluation and subsequent effort to stabilize the yuan have had a dramatic impact on global markets and a deeper devaluation would likely be accompanied by similarly dramatic adjustments. For their part, BofAML says a devaluation to 8 would send commodities down another 25%, deepening an already horrendous slump and send further shockwaves through the global banking system.

*  *  *

From BofAML

Our Asia strategy team points out news reports that some Chinese government agencies are planning on the assumption of USD/CNY at 8.0 for the end of 2016. This would be a 20% devaluation back to 2006 levels. Considering the major impact of the 3% devaluation this August, the implications for EEMEA would be profound. Asset prices of commodity exporters would again suffer the most, as they have done since 10 August. Potentially even more damaging would be risk of financial contagion throughout the global banking system. 

Potentially profound impact on commodities and through banks channels The long-term CNY/commodity relation implies potentially significant further downside in such a scenario, though one should not go so far as to extrapolate from this August. The bad news: assuming the broad commodity indices follow CNY back to 2006 levels in USD terms, the downside could be 25% (Chart 1).

The other, and potentially more risky, channel of contagion to EEMEA could be the global banking system. Reassuringly, indicators of funding stress, such as the EUR/USD cross-currency basis, have not reacted to the recent volatility at all. However, surely a 25% devaluation in China would have a significant impact on global credit quality? If it did, capital inflows to all of EEMEA would be hit, and not to commodity exporters: Turkey depends on EU banks to fund its deficit, and CEE is closely tied to EU banks.

 

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Wed, 09/02/2015 - 15:13 | 6501000 Gab Timov
Gab Timov's picture

"These go to 11."

Wed, 09/02/2015 - 15:13 | 6501001 Dubaibanker
Dubaibanker's picture

What if.......what if, USD goes to 8 for 1 yuan? What if.....

Wed, 09/02/2015 - 16:59 | 6501567 J Jason Djfmam
J Jason Djfmam's picture

What allows the Chinese to change the value of their currency against the USD but keeps the US from changing

their currency against the Chinese currency?

Simplified: Can we move to nullify their move?

Wed, 09/02/2015 - 17:39 | 6501726 daveO
daveO's picture

By buying an equal amount of Chinese assets. I don't see that happening. Some form of QE instead, to offset the imported deflation. This steals from the whole world via inflation. China is the factory plantation of the western world. Bankers aren't gonna stop that willingly.

Wed, 09/02/2015 - 20:57 | 6502390 MalteseFalcon
MalteseFalcon's picture

China is calling all the shots now and the FED will simply bear mute witness.

QE 99?  Rate hike?  Negative rates?  Cash confiscation?  The hokey pokey?

Doesn't matter.

Wed, 09/02/2015 - 15:14 | 6501007 Berspankme
Berspankme's picture

I moved to China end of 2004 and it was 8.37 /1

Wed, 09/02/2015 - 15:15 | 6501011 Skateboarder
Skateboarder's picture

Will they finally stop buying up CA real estate?

Wed, 09/02/2015 - 16:48 | 6501543 gizmotron
gizmotron's picture

They're just getting started.

Wed, 09/02/2015 - 17:50 | 6501771 kiwigal
kiwigal's picture

Will they stop buying up Auckland, New Zealand real estate to the point the young generation will never own a home...same happening in Australia, Canada...all our governments are guilty for allowing it.

Wed, 09/02/2015 - 18:35 | 6501962 OpenThePodBayDoorHAL
OpenThePodBayDoorHAL's picture

One of the things I love about Australia since I moved here from the US 9 years ago is that it's small enough to govern (they still do a crappy job but that's another post). I sent an email to the Treasurer Joe Hockey, asking why they allowed $14B in "black" Chinese money into real estate here in the last 10 years. Not only did he respond, but he asked his assistant to arrange a call with me (!) to discuss. These guys have an election coming up and they must be desperate...nevertheless it was cool.

Wed, 09/02/2015 - 20:38 | 6502316 kiwigal
kiwigal's picture

It will be interesting to see if those Chinese dollars destroy our respective housing markets. Everything is cyclical and like the 87 Sharemarket crash there are going to be a lot of mortgagee sales. All eyes on the Fed for an interest rate hike. As the Chinese say..may you live in interesting times.

Wed, 09/02/2015 - 15:15 | 6501014 BandGap
BandGap's picture

Blah, blah, blah.

Paycheck to paycheck, one step at a time. As the ice gets thinner you have to decide between smaller steps to keep your balance or better distribution of your weight as to not break through the ice. Either way, the further out you go the deeper the water under the ice.

Time to wait out the winter.

Wed, 09/02/2015 - 15:17 | 6501017 JustObserving
JustObserving's picture
"What If China Devalues To 8?"

The smart Chinese better be buying gold and silver as if there is no tomorrow

Wed, 09/02/2015 - 15:17 | 6501026 Temporalist
Temporalist's picture

Isn't it weird that their evil government told the citizenisms to buy gold?  I mean how barbarous can you get!

Wed, 09/02/2015 - 15:25 | 6501077 Zirpedge
Zirpedge's picture

Maybe you gold bugz should move to China or Russia. Whose side are you on anyhow?

Wed, 09/02/2015 - 15:33 | 6501129 jcaz
jcaz's picture

You're always so edgy, Zirpage- that's hot.  I wanna spoon you......

Wed, 09/02/2015 - 15:35 | 6501145 El Vaquero
El Vaquero's picture

Don't know if I should green that or junk that.

Wed, 09/02/2015 - 16:08 | 6501309 TongueStun
TongueStun's picture

Are you a negro? If so, "Junk That" could very well mean you want to sodomize him.....

Wed, 09/02/2015 - 15:47 | 6501201 Consuelo
Consuelo's picture

 

Kill 'em all, & let Gawd sort 'em out...!!!    USA!!! USA!!! USA!!!    Sean Hannity...!!!  Rush Limbaugh...!!!   Yer a great American...!!!    The exceptional people...!!!

 

Is that better...?

Wed, 09/02/2015 - 16:04 | 6501293 Zirpedge
Zirpedge's picture

If you don't like it you can get out!!! Once we build those border walls, you might not be able to.

Wed, 09/02/2015 - 16:19 | 6501387 Ayreos
Ayreos's picture

I am keeping a list of "Typical defensive murricane phrases" and you appear to be an expert! I would like your advice on how to extend my list! (I am slightly stumped because americans seem to like repeating the same few lines ad nauseam!)

 

Currently i got:

 

"Love it or leave it."

"Clean up your own backyard first."

"Keep your own house in order."

"We saved/beat your ass in WW2."

"Do you even get to vote in your country?"

"...but we're the freest country in the world!"

"Put your money where your mouth is and leave!"

"Watch out for those always pointing their fingers at others because they have 3 pointing back."

 

Any more you can recommend?

Wed, 09/02/2015 - 16:43 | 6501522 Temporalist
Temporalist's picture

"Duuuhhhmurica...we're number one!"

"We're ecksepshunal!"

"If you are not with us you are against us."

"It's Obama's/Bush's/Clinton's/Reagan's fault!"

"Demirats!"

"Repuklicans!"

"We need a fence and wall."

"They are heroes."

Wed, 09/02/2015 - 19:27 | 6502111 mygameon
mygameon's picture

Ayeros,

Here is another for you:

I am here to chew bubblegum and kick your ass! Damn if I'm suddenly all out of bubblegum.

Thu, 09/03/2015 - 01:09 | 6503215 deKevelioc
deKevelioc's picture

I certainly hope you didn't pass on genes.

Wed, 09/02/2015 - 15:17 | 6501027 FreeShitter
FreeShitter's picture

Expect missiles instead of warehouses....

Wed, 09/02/2015 - 17:00 | 6501586 J Jason Djfmam
J Jason Djfmam's picture

Occam's Razor.

Wed, 09/02/2015 - 15:21 | 6501058 gwar5
gwar5's picture

I just want to know if Walmart is going to pass the savings along to us coz Ima wait some. 

Wed, 09/02/2015 - 15:35 | 6501142 froze25
froze25's picture

Not a chance bud.

Wed, 09/02/2015 - 17:44 | 6501746 daveO
daveO's picture

Ebay! U can buy direct these days.

Wed, 09/02/2015 - 15:24 | 6501066 ToSoft4Truth
ToSoft4Truth's picture

This was prophesied back in the ‘70’s!

 

Americathon (1979)

 

In a story told in narrative flashbacks, a young TV consultant is hired by the President of a bankrupt USA to organize a telethon in order to prevent the country from being repossessed by wealthy Native Americans.

 

AMERICATHON (1979) ORIGINAL THEATRICAL TRAILER

https://www.youtube.com/watch?v=BqYoB6BLOMw

 

 

 

Wed, 09/02/2015 - 15:25 | 6501075 sTls7
sTls7's picture

Oh yeah, Bofa, the idiots that acquired Country.  lol.

Wed, 09/02/2015 - 15:27 | 6501090 sudzee
sudzee's picture

Commodities will be bought and sold in local currencies. The world can exist quite well without referencing the US$.

Wed, 09/02/2015 - 15:28 | 6501093 trader1
Wed, 09/02/2015 - 15:30 | 6501113 RawPawg
RawPawg's picture

yeah,good luck...like 2016 is gonna matter...it's all about Sept/Oct 2015,baby.

 

Wed, 09/02/2015 - 15:33 | 6501126 Sudden Debt
Sudden Debt's picture

Actually a yuan devaluation would boost commodities as the wage cost would drop below the cost of the materials, the 20/80.

This is what made china great because in the west it's the other way arround, 80% wages, 20% material.

So this article has it all wrong and bloomberg should know better.

 

And the fact that commodities drop now with this yuan devaluation is pure manipulation to force china to go that 1 step to far.

 

Commodities are the big mac index, it's the wage index that matters. 

 

Wed, 09/02/2015 - 15:34 | 6501136 Chuck Knoblauch
Chuck Knoblauch's picture

The USD$ will go up.

Isn't that what you want?

Dumb asses.

 

Wed, 09/02/2015 - 15:36 | 6501150 q99x2
q99x2's picture

Yo. Since China and Russia knows that the world is at war with the NWO they will devalue no doubt. I'd devalue and create a limited amount a crypto-currency that could be used as a world currency like yesterday. FU FED.

Wed, 09/02/2015 - 15:41 | 6501178 lolmao500
lolmao500's picture

Well then Canada's economy is FUBAR if that happens.

Wed, 09/02/2015 - 15:49 | 6501217 Consuelo
Consuelo's picture

 

 

If everyone devalues, and that in turn forces 'commodities' down, but at the same time currencies become worth less and people are looking for something 'tangible' to drive their devaluing currency back into...   How does that work...?

Wed, 09/02/2015 - 16:11 | 6501326 headhunt
headhunt's picture

It doesn't - paper becomes just that - paper

Wed, 09/02/2015 - 15:49 | 6501219 Son of Loki
Son of Loki's picture

I think they will keep the RMB strong. Makes no sense to weaken it now.

Wed, 09/02/2015 - 15:52 | 6501228 Tsar Pointless
Tsar Pointless's picture

Agreed.

Wed, 09/02/2015 - 16:10 | 6501319 headhunt
headhunt's picture

They have no choice.

All those who want The Ruble/Yuan in place of the dollar as a reserve currency will continue to loose their ass as the Yuan/Ruble they are paid with becomes worth less and less.

Deflation is an unforgiving bitch.

Wed, 09/02/2015 - 17:55 | 6501793 bid the soldier...
bid the soldiers shoot's picture

There's a difference between devaluation and deflation.

A central bank can devaluate in September and revaluate in December.

Wed, 09/02/2015 - 15:56 | 6501246 PoasterToaster
PoasterToaster's picture

Why is the Western world's industry all located in China?

Wed, 09/02/2015 - 16:11 | 6501331 TongueStun
TongueStun's picture

So I can get an HP printer for 28 bucks, instead of an American made one for $128?????

Wed, 09/02/2015 - 17:08 | 6501607 J Jason Djfmam
J Jason Djfmam's picture

Because China has throwaway labor and no EPA.

Wed, 09/02/2015 - 17:50 | 6501769 daveO
daveO's picture

Ahh, good ol' Nixon gave it all to us. What a puppet bastard. The die was cast over 40 years ago.

https://en.wikipedia.org/wiki/Richard_Nixon#China

https://en.wikipedia.org/wiki/Richard_Nixon#Governmental_initiatives_and...

Wed, 09/02/2015 - 17:11 | 6501617 Consuelo
Consuelo's picture

That's a great question actually, simple and succinct.    My take:

 

- Some companies want cheap labor which translate into higher profits.

- Some companies seek relief from the ~extremely~ overbearing regulatory environment.

- Some companies desire both.

- Some companies are 'loyal' to their home nation, but the regulatory environment proves too much for it to be a profitable endeavor.

- For some companies it wouldn't matter the regulatory environment because 1st world wages can't compare to 2nd and 3rd world wages.

- Make the regulatory and tax advantages of doing business at home a 'no brainer' and we might have an honest crack at it...?

Seems to me at the very least, government - to the extent that it must exist at all, should 'honor' the machine that pays its salary and do (or Undo) whatever is necessary to encourage the most it can from those who wish to do business inside America.

 

 

 

Wed, 09/02/2015 - 17:33 | 6501700 topshelfstuff
topshelfstuff's picture

The True answer is the removal of a Gold backed Reserve Currency or call it Nixon's 1971 Closing the Gold Window. Note Kissinger made a "Secret" trip to China one month before.

Of course the reason was for Big Business Elites to  make heavier Profits and screw the US People. This was all planned. The proof seen in the removal of US Silver Coinage in 1965, '64 was the last of Real Money

Wed, 09/02/2015 - 20:08 | 6502231 MSimon
MSimon's picture

The US is the #2 manufacturing power in the world. If you believe the Chinese numbers.

Wed, 09/02/2015 - 16:10 | 6501315 buzzsaw99
buzzsaw99's picture

throw the peons unda da bus. china is turning japanese.

Wed, 09/02/2015 - 16:11 | 6501332 CHC
CHC's picture

Go ahead China - I dare you!!

Wed, 09/02/2015 - 17:09 | 6501563 Gatt
Gatt's picture

Perhaps you have missed the point - this stockbubble in China seems to have been pumped up and burst by local puppets of western banksters just at a time when the Western gold vaults have run dry.What a great face saving way to get the best return & dump the MAX of their mountain of US$ (that are likely to soon become worthless with the likely death of the petro $ ) in exchange for all the Western investments in China & overseas owned local deposits of RMB! All this while letting Chinese stock prices slide as gently as possible back to spring 2014 levels which were a more realistic valuation of the assets represented........ and when the storm clears many nations will defacto peg to the RMB ignoring the $........

Wed, 09/02/2015 - 18:27 | 6501934 daveO
daveO's picture

dump the MAX of their mountain of US$

Convenient for the FED and another round of QE.

Wed, 09/02/2015 - 18:36 | 6501965 Deathstar
Deathstar's picture

A very small and unheard of news story back in 2004 reported that the rothkikes (rothchilds) sent a representative to the bank of china to "help out" with their central bank planning....

I cannot find the article now, but it was at that point that the gold buying I did the year before was a 100% sure bet.

Wed, 09/02/2015 - 17:30 | 6501690 bid the soldier...
bid the soldiers shoot's picture

The fact is that China's stock markets had no malicious short selling problem until the Americans became members in the autumn of 2014.

Ditto a manipulation problem.

Ditto an extreme margin debt problem.

Then Goldman Sachs, JP Morgan, et alia, like the rats that carried the bubonic plague flea, showed up. 

Jews and Gentiles drooling for money, money, money.  A couple of old timers remember the huge rip-off/scam they had pulled in Tokyo in 1989. So they landed in Shanghai with festering pustules on their faces, hungry to scam another wealthy Asian nation.

But the Chinese were waiting for Blankfein and GS. 

After the Wall Street thieves had managed to double the Shanghai index in about 6 months, and the goniffs were already in the 'shorting' phase of a market they had doubled, on margin from Chinese banks, and were selling the stock they had initially bought, which is what raised the Shanghai composite in the first place.

They would profit by selling their original purchases, while their shorts became more profitable every day.

The Chinese fired back and the companies where these Wall Street chazzers had large investments suspended trading in their own stocks.

PLEASE NO PEEING FROM LAUGHING.  THIS IS A RESPECTABLE WEB SITE.

Now

1) the margin clock is still ticking. (tick tock tick tock) 

2) talk about devaluation to 8 yuan to buy 1 dollar.

That means when the suspension is finally lifted --  maybe on Hanukka or next Pesach --  and their positions are closed out, GS will be paying 8 yuan for every dollar they bring back to Wall Street.  When they only got 6 yuan for their bucks when they moved in for kill last year.

Maybe there is a God.

 

Wed, 09/02/2015 - 17:59 | 6501807 Moon Pie
Moon Pie's picture

That would be nucking futz brilliant!  You just made me have the best thought dream I've had in days.

Wed, 09/02/2015 - 19:01 | 6502046 daveO
daveO's picture

From http://www.bloomberg.com/news/articles/2015-08-20/china-s-stock-index-fu...

The People’s Bank of China pumped a net 150 billion yuan ($23 billion) into the financial system this week, data compiled by Bloomberg show. That’s the most since before the Chinese New Year holiday, when seasonal demand for cash spikes. The authorities are providing another 170 billion yuan through loans and an auction of deposits.

Wed, 09/02/2015 - 20:13 | 6502245 MSimon
MSimon's picture

Cash out or another bubble?

Wed, 09/02/2015 - 20:25 | 6502278 bid the soldier...
bid the soldiers shoot's picture

Bloomberg publishes the numbers that the PBOC gives to it.  But we don't know what stocks the state agency is buying.  Can a Chinese state agency buy stocks whose trading has been suspended?  We didn't even know that corporations could suspend trading in their own stock.  How can we possibly know if state agencies have the right to trade in suspended stock?

Certainly none of the Wall Street firms who are involved in "malicious short selling" would want to hear that state agencies are raising the price of closing malicious positions.

On September 1, 2014 the Shanghai Composite was 2235.  In June 2015 the same index was 5166.

In the Fall of 2014, when foreign firms were permitted to join the Shanghai Stock Exchange margin debt was 500 billion yuan. In June 2015 it was 2.5 trillion. 

None of this had to do with the Wall Street Shysters.  The western press would have you believe that when Goldman Sachs arrived on the scene, 40 million Chinese people opened accounts and bought on margin.

The instability of the Shanghai Stock Market was all their fault.

Everybody knows that the authorities are going to check each one of those accounts to see whether the name Blankfein appears on any of them.

Meanwhile I strongly suggest that Lloyd doesn't take Mrs B to see the Great Wall.

 

Thu, 09/03/2015 - 06:29 | 6503496 redd_green
redd_green's picture

Re "We didn't even know that corporations could suspend trading in their own stock."  what, man, you kidding?  They do it all the time! 

Thu, 09/03/2015 - 06:28 | 6503495 redd_green
redd_green's picture

No, 7 to 1 or 8 to 1 is not 'dramatic'.   100 to 1, that is dramatic. 80 to 1, that is dramatic.   8 to 1 is playing games.

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