What China's Stunning Announcement Means

Tyler Durden's picture

One of the catalysts for today's selloff was the thoroughly unexpected announcement by the Chinese Foreign Exchange Trade System (part of the PBOC), which as we said earlier, hints at substantially more devaluation of the Chinese currency, a currency which as is well-known, is pegged to a dollar which has been soaring in the past year, and which many believe will continue to soar after the Fed hikes rates.

This is what the CFETS said:

... it is consistent with international practice that CFETS publishes its RMB exchange rate index. Since the beginning of 2015, the trend of this index has been relatively stable. The index is 102.93 on November 30th, appreciated 2.93% from the end of 2014. This shows that, even though RMB has depreciated against USD since the beginning of this year, it has appreciated modestly against a basket of currencies. Therefore, RMB is relatively a strong currency among the major international currencies.

Lots of words to say one thing, China has revealed its own trade-weighted index, and this is how we explained why first thing this morning: "the Trade-Weighted Yuan is still too strong."

Yes, China will henceforth look at the Yuan not only relative to the USD but relative to the currencies of all its trade partners (since the USD keeps surging and on a relative basis, China's deval to the USD means nothing at all relative to all other currencies).

Why is this a big deal? Because as frequent readers will recall, as we noted on August 11, just hours after China's just as stunning one-time devaluation of the Yuan, the reality is that the Yuan... did not devalue much at all.

This is what we said precisely 4 months ago:

This morning's Chinese record currency devaluation, in which the Yuan was devalued by 1.9% against the USD may sound like a lot... until one considers that the Chinese currency has been pegged to the US dollar, which as reported extensively over the past year, has exploded higher not so much due to the strength of the US economy but due to expectations of what may be the Fed's biggest mistake in recent years: a rate hike which will assure the US economy's tailspin into recession.


In effect what the PBOC did earlier today is inform the world it would no longer stay pegged to a Fed whose monetary intentions are complete lunacy for a mercantilist exporter, one whose economy is getting crushed as a result of the tight linkage between the USD and CNY, and even if it means massive capital flight as the opportunity cost, so be it. Furthermore, considering that the CNY was until recently the second most expensive currency according to Barclays, it is amazing it took Beijing this long to pull the plug.

We then accused the PBOC, which sought to assuage fears that it too was doing a "one and done" of lying:

how much more devaluation is in store for the CNY? Well, if one believes the PBOC, today's intervention was a "one off." The problem is that just like every central bank in modern history, the Chinese central bank is lying.

We proceeded to give a quick observation of what one can expect:

According to the PBOC press release, the unexpected change in fixing mechanism today was in response to the prospective Fed liftoff, which has the potential to cause further strengthening in the USD and capital flow volatility. The CNY on a trade weighted basis has appreciated sharply alongside the USD strength, and is still about 15% higher than a year ago after today’s move. However, we think a FX move of today’s scale, while significant by the standard of CNY’s historical movement, is unlikely to give a strong boost to growth.


In other words, today's "devaluation" is a tiny pinprick in the grand scheme of the CNY's revaluation since the USD surge started in 2014. This becomes especially apparent when one sees the impact of the CNY's peg to the soaring USD, and last night's shocking announcement, in context.

We then answered how much more downside in the CNY there is: "now that the PBOC has thrown in the towel and will aggressively devalue the currency, the answer is somewhere between 10 and 15% more if China wishes to regain its competitive status as of just last summer!"

Finally, this is how the CNY devaluation looked like in the context of the trade-weighted Yuan as of August 11.


* * *

Fast forward to today, when China basically said that going forward it will consider the (de)valuation of its currency not only to the USD but to all key currencies.

So how does the trade-weighted Yuan look like today? Behold:


What the chart above shows is that for all the talk about a Yuan devaluation, it is basically unchanged from where it was this August if looked at on a trade-weighted basis... which is precisely how China will be looking at it now!

What this also means is that for anyone who thought the Yuan devaluation is over, now that the currency is at the lowest level relative to the dollar since 2011, the reality is that the devaluation relative to everyone else is only just starting.

And, with the PBOC's warning that the "RMB is relatively a strong currency among the major international currencies" the real devaluation is, just as we warned four months ago, about to be unleashed. Expect at least a 15% reduction in Trade-Weighted terms in the coming weeks and months, especially if the Fed hikes.

Finally, the real purpose of the PBOC's exercise in FX management today was, just like in August, to fire a warning shot at the Fed's rate-hiking plans. Only this time the warning shot is far, far louder.

In September the Fed postponed its rate hike as a result of China's devaluation. Will it do the same again next week? Because if China is about to unleash a 15% deval of the CNY against the entire world, expect a flood of Chinese FX reserves as the PBOC tries to control the glidepath of its currency, and avoid an all out collapse driven by soaring capital outflows.

In other words, we are now right back where we were in mid-August, just before the bottom fell out of the market.

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Jtrillian's picture

The race to the bottom has begun.  China's version of calling a hand a poker.  It knows who is holding the REAL cards (precious metals).  It is forcing the fiat currency bluff in order to become the worlds economic super power. 

The US will respond with what it has left -  Military force.  Because it is unlikely to have the phsycal metal reserves it claims to have.  And the power elite will do anything to maintain the status quo (meaning their exploitation of the masses).  They are acting with the mindset that it doesn't matter who has the wealth as long as you can TAKE IT from those who have it. 

My how far we have fallen. We have become a country that is run by corrupt officials, bribed by greedy billionaries, controlled by the corporate fascists, all of them above the law, while promoting opinion as though it were fact while manipulating the minds of the American public via regular omission of the facts. 


SimplePrinciple's picture

"the fiat currency bluff"

Yes, they are bluffing to sustain dollar strength while they sell their Treasuries hand over fist.

Jtrillian's picture

Agreed.  If you look at the US dollar index $DXY and what happened to it in 2000 and 2008, it doesn't take a rocket scientist to see what is coming, especially when you realize all that is backing it is 19+ trillion of unservicible debt (that has grown exponentially in recent years). 

But people tend to live in a state of cognititive dissonance and reject the facts when they conflict with their pre-existing beliefs.  No one likes a party pooper.  And this party is not going to end well at all.  Those who are truly paying attention KNOW THIS.

janus's picture


not that i disagree with any of your points or the gist of your position, but you're not appreciating the totality of what's involved here.  

think of this as yet another iteration of the opium wars.  in times past, we addicted these peoples to a substance grown off-shore (in this case india), and with it extracted a silver horde accumulated over thousands of years.  in the last 20 or so years we have addicted 1.2 billion peasants to protein and other elements of a western diet (grown off shore, mind you), with the intent of extracting whatever treasures have been accumulated during this most recent advent of chinese statecraft -- merchantilism.  

they thought they could play our game and beat us at it?...not so fast.  how long do you think it will take to drain their gold vaults with 1.2 bellies screaming for protein?  and who controls the rice fields in thailand?  (hint, it's not china nor russia)  do you have any idea how well positioned are our operatives throughout the mainland and along its periphery?  we will stoke the flames of internal conflict and dissent at a moment's notice -- the planks of propaganda have been installed and they are progressing as-to plan.

this has always been the case -- any nation that cannot service the dietary and energy needs of its population domestically is, in a word, fucked...and the chinese are royally fucked.  this has all been a farce from the beginning.  the chinese culture is, again, informed by the sensibilities intrinsic of peasantry; it was never, and never can be, a consumerist nation of cooperative 'citizens'...what we call a republic.

know also that the united states is one gigantic and interconnected megalith, an holistic war-making apparatus.  whether that be economics, energy, agri-business or armaments it's all arrayed to the same purpose -- making war.  

the tendency is to feel sorry for the chinese, but they knew who and what we were when they got in bed with us...they just thought they could out-smart ole 'round-eye' and were sold on some nonsense about the future belonging to the sino-man.  no, really, at the highest levels they were effectively convinced that our agents were actively working to undermine uncle sam and elevate the chinese to assume the mantle of new world hegemon.  i think they're starting to see that they've been had.

here's another interesting question:  what nation's leadership most needs warfare on this planet?  what nation has a surplus of military-aged men without the hope of ever securing a wife?  what nation's economy is tanking and best calibrated for a revival through cranking up its armament industry?  what nation's leadership sees warfare as its means for retaining their position of authority domestically?  china is going to do exactly what it's been programmed to do.  my guess is that they'll figure out some way to antagonize india on one flank and japan on the other, and scrap it out for regional supremacy.  btw, war has a way of draining gold-vaults, too.

'may you live in interesting times',


Husk-Erzulie's picture

Really thought provoking analysis Janus, thanks.

Demdere's picture

Someone is suprised by this?

And the same people will be suprized when the same happens to the value of our $.  It is the standard way govs load their disasters on the citizens.

buzzsaw99's picture

yeah, we pretty much knew that. devaluing 0.01% was never going to do much.

JustObserving's picture

If the Yuan keeps falling, the Chinese better start buying gold to protect their wealth.

Bastiat's picture

You mean "more gold" or "more Chinese" or both.

highandwired's picture

Bitcoin loves this news. 

OpenThePodBayDoorHAL's picture

Yes, Bitcoin is one of the best securities I know. Oops, 



USisCorrupt's picture

Diversification is KEY !


And YES I love BitCoin as every Stacker SHOULD !

fukidontknow's picture

The love of money is the root of all evil.


Jtrillian's picture

Is that sarcasm or have you been living under a rock?

GartmansTaint's picture

Nobody is raughing out roud at this one.

THE COIN's picture

They're treating us like we're Comfort Women.

KnuckleDragger-X's picture

Well now that they are an SDR currency, it's all shiny forever. China is going to discover that they are just another clown in the monetary circus......

The Ram's picture

Get ready for more mini-nuke explosions in industrial areas: 5, 4, 3 ,2, 1.......

I am surprised China did not retaliate for those explosions....wait, maybe they did economically.. US imploding.


Ms No's picture

There was one in Russia and one in China.. posted at the end of the page.

Kaiser Sousa's picture

well played china...

u allow the fucks in the US to destroy their industrial and manufacturing base in exchange for cheap shit produced in ur country with slave labor...

u put up with the Fed continuing to destroy the value of ur US Treasury's and dollar reserves while they talked shit about it being "your problem" and just bided ur time...

then u sat and  watched the US further impoverish itself starting wars all over the Globe thinking that it was still the "Unipolar" power that could do whatever it wanted to whomever it wanted without consequence...

then u flipped those worhtless green pieces of paper into 1 of the only 2 forms of real money, and also started buying up the real estate of the "exceptional" nation leaving its citizens renters on their own soil while simultaneously dumping those garbage Treasury's...

now that u got the IMF to accept u into "their" club, u continue to devalue ur currency placing more pressure on the banker controlled US bankrupt government and economy ...

and now u say to Ameridumb -

"How ya like us now....."


ersatz007's picture

You're giving china way too much credit. You're forgetting the financiers, politicians and corporations (internationally, but especially in the US) that were the primary architects of of what you described above.

MasterControl's picture

He's too happy about the US going under.
He will regret it soon enough. 

USisCorrupt's picture

If YOU want ANY FUTURE for you or your children or their children you TOO should want it to happen you Good Little SLAVE.


Wake UP !

Kaiser Sousa's picture

yes im giving CHina credit...

and im giving the bankrupt United States credit as welll...

credit for destroying itself...


OpenThePodBayDoorHAL's picture

The Chinese don't give a rat's ass what happens to their USTs, they got what's really valuable out of the deal: all the world's manufacturing jobs, new ports, new bridges, new highways, new airports, new schools, new high tech factories. Now they can sit back, devalue, and watch the fun

ZippyDooDah's picture

China seems to do well at the long game, mostly by not sticking their necks out too far. Emerging empires, take note.

Dragon HAwk's picture

makes sense really why peg to a dollar when your in a currency war and everybody is devaluing against every body else.

  Gold is the Rosetta stone all currencies will eventually be measured against.. and that my friends is what the bankers fear the most..

hang on knock at the door...

pathosattrition's picture

We're in the beginning of the transition from a USD-denominated world with the locus of power in New York and DC to a CNY-denominated world, for the very same reasons the dollar became king: the entire world does business with China, the manufacturing powerhouse. Expect the dollar to fall along with dollar-denominated assets. Without gold convertibility or the petrodollar, all the exported inflation over the past 4 decades will find its way back to main street, USA.

Amish Hacker's picture

"as the PBOC tries to control the glidepath of its currency"

The glidepath of a brick thrown from the roof of a tall building.

ghostzapper's picture

Long Yuan printing machines, helicopter pilots, and handcuffs.  

NoWayJose's picture

And as the world rushes to devalue, someone thinks it is an ideal time to dump silver under $14!

MasterControl's picture

Bill Ayers has to be filled with glee.

BarnacleBill's picture

Yes. There are plenty of places online where you can chart the value of the Chinese currency against other major ones. Against the Euro, for instance, the yuan has appreciated 7% or so over the past 12 months, taking its latest decline into account. Americans often forget just how strong the USD is, compared with its trading partners' currencies. Check it out for yourself.

Omega_Man's picture

why not, USA is trying to do the TPP to move factories from China to other nations. So if Yuan is lower to cover the tariffs that will allow them to compete. 

Vlad the Inhaler's picture

The Fed's mistake is not the coming rate hike, it was holding rates low for so long.

DirkDiggler11's picture

Looks like the Chicoms had better round up another bunch of those "viscous short-traders".

Full Disclosure:

Short - Chineese Brokerage Houses CEO's life insurance policies

Long - Rope, flex cuffs, hoods, and black limousine rides to the outskirts of town...

conraddobler's picture

It's a good idea to remember the long term perspective here.

While we are currently run but some of the greatest grifting asshats imaginable our overall positon in the world remains relatively good.

We exist in a hemisphere that is largely free from resource generated strife if you want to know the definition of hell it is one thing and that is real hunger due to scarcity of resources.

We really don't have a scarcity problem in this country we have a crony siphoning problem which you can fix with proper actions.  You really can't fix a true scarcity problem other than war, ie taking it from those that have it.

Long term don't get too fixated on China their biggest problem is their own people.

Of course they are schooling our leadership now would anyone expect anything else but real estate tells you one thing.  Location, location, location.

We have two deep blue seas between us and the old asshat world.   We have bountiful resources and to the greatest extent of a major industrialized power we haven't shat in our own nest as badly as those others are shatting in theirs.

Bountiful water resources for the most part, airable land, a decently educated population and 5000 plus newks.

And oh yeah despite what everyone would want you to believe a solid portion of the population that understands the founding principles of this nation even if they aren't being adhered to at the moment.

We're good.

hotrod's picture

So does Yellen raise next week knowing that China will not go along for the ride

AlltheWine's picture

China is not devaluing vs. gold.

And, for those looking for an anser to the explosion in comex GC open interest vs. registered gold stocks, look no further than the Chinese.

They are literally using Comex to push paper gold lower in an attempt to maintain purchasing power vs. it, even as they devalue vs. the USD, all in an attempt to pave the way for reserve currency status.

As the Brits learned far too late in WW2, and as the US is about to learn, he who owns the gold holds dominion...


bluskyes's picture

Perhaps it would be better said - who holds the gold holds dominion.

it aint paranoia if they really are out too harm you's picture
Arable land (hectares per person) United States 0.49


China 0.08




Never forget about food supply. We export, they import.


United States is a net exporter of food, exporting $1.28 in food for every dollar it imports.

The United States accounted for over 24 percent of the value of China’s agricultural imports during 2012-13, a larger share than any other country. U.S. agricultural sales to China doubled from 2008 to 2012, reaching nearly $26 billion in annual sales. China has overtaken Japan, Mexico, and Canada to become the leading export market for U.S. agricultural products. 

I apologize for all the cut and paste.

Ms No's picture

Somebody doesn't seem too happy, I lost track but I think we are at  9 or 10 of these.  This can't be a coincidence any longer, maybe the West can't afford these currency games and WWIII at the same time. 



Sorry_about_Dresden's picture

I have a small position, 60,000rmb, I have been to China 4 times, and I just don't see the US system as superior to the Chinese system. I bought my rmb at around 7.5rmb/usd.

My intuition says stay the course.

I just don't get why the rmb is dropping against the usd?? Everything I have seen says the opposite.

Should I stay the course? 

SweetDoug's picture

Don't fight the trend.

The market can stay irrational longer than you can stay solvent.