China's Currency Bluff to Stop Capital Flight

Looking for a currency bluff? I have one!

Yuan Declined 10% Since February

The Renmimbi (yuan) is down 10% since the end of February and is risk of breaking 7 per dollar.

Currency Threat

The Wall Street Journal reports China Puts Yuan Skeptics on Notice as Currency Nears Decade Low.

> A top Chinese policy maker warned investors to stop betting against the country’s currency Friday, boosting the yuan after it had fallen to nearly its weakest in a decade.

> “For forces that try to short renminbi, we fought hand to hand a few years ago, and we are very familiar with each other,” said Pan Gongsheng, a vice governor of the People’s Bank of China, at a briefing on Friday. “I think it’s still fresh in both of our memories.”

> The comments from Mr. Pan, who is also the head of the country’s foreign-exchange regulator, were the latest sign that Beijing is growing concerned about its currency again, more than three years after a previous bout of depreciation sparked global market havoc.

> China has made it more expensive this year for traders to place bets against the currency and tweaked the mechanism for setting its official daily trading range—efforts aimed at reining in the yuan’s tumble.

> After a nearly 7% selloff this year, the yuan is at the brink of hitting 7 per dollar—a closely watched threshold that could trigger further selling if Chinese businesses and individuals decide that means they need to expatriate capital before any further decline. The yuan last traded weaker than 7 per dollar in May 2008 in the onshore market, while offshore trading was only introduced in 2010.

Obvious Bluff

I know an obvious bluff when I see one, and that's an obvious bluff.

Two Problems

  1. China needs the yuan to fall to counteract Trump's tariffs
  2. China does not want the capital flight that will accompany a sinking yuan

Obvious Solution, Obvious Bluff

Points 1 and 2 are contradictory. The only solution is to let point 1 happen while denying they will let it happen.

Expect Volatile Moves

China will act, at times, to make it appear it will defend the yuan even as it will slowly let it sink.

Mike "Mish" Shedlock

Comments (8)
No. 1-7
JL1
JL1

Every Chinese I know is trying to get cash out of China.

Chinese economic model where growth has been goosed by Chinese debt loving communists creating debt mountains and hiding unrepayable debts is as unsustainable as the debt mountains in USA and EU...

SMF
SMF

How much Chinese money was used to buy Real Estate around the world?

Realist
Realist

Looking at a 10 year chart, the yuan was 6.81 to the dollar in 2008. It strengthened to 6.05 by 2014, weakened to 6.95 by 2016, strengthened to 6.27 earlier this year, and has weakened again to 6.97 now. That is a 13% range. Other currencies have fluctuated far more vs the US dollar than that. The Euro has fluctuated through a 31% range and the Canadian Dollar a 35% range during the same 10 year period. Currencies are supposed to fluctuate. The biggest currency manipulator in the world is the country that has the worlds reserve currency; the US. There are so many US dollars in the worlds financial system, plus you have a President who openly talks about his currency, interest rates, etc, that he is responsible for more fluctuation in currency than anyone else.

thimk
thimk

well somethings up in China. according to this missive the elites are buying large quantities of the "barbaric relic".

gregggg
gregggg

This explains China's increased political involvement in Singapore over the last couple of years. The biggest market for offshore Yuan.

Kinuachdrach
Kinuachdrach

The dream of control! The Chinese Central Bank is like everyone else's Central Bank -- it has influence over the exchange rate … until it doesn't.

China is in the interesting position of being a massive importer of essentials (food, fuel, raw materials) as well as a massive exporter of mainly non-essentials and (with a significant unofficial component) capital. Changes in the exchange rate affect both sides of that equation.

VPKK
VPKK

what a contrarian signal!