As I was re-reading my published piece in MINT on Gold on this Tuesday morning, an email containing WSJ flash news on the lower fixing of Chinese Yuan by the People’s Bank of China (PBoC) snuggled into my mailbox. PBoC had fixed the yuan 1.9% lower. Well, it is not PBoC. It is the Central Committee of the CCP. PBoC only provides inputs and does not take decisions. My first thought was that it was the first instalment of many more rounds. This is what I had written in April 2015, when we published a note on the China devaluation. In turn, that was a follow-up to an earlier ‘Discussion Document’ that we had published in Takshashila in October 2014:
Higher US interest rates and a cheaper yuan make servicing foreign debt costlier and push some marginal cases into debt default with the risk of a bandwagon effect on domestic debt too. Therefore, we should note here that China is biding its time to devalue the Renminbi rather than foreclosing on that policy option. In fact, as Andy puts it, when China’s growth slowdown becomes truly unbearable, devaluation will be firmly on the table and will be carried out. Currency devaluation by China will become inevitable sometime in the next twelve months. [Link]
Andy here refers to ‘Andy Mukherjee’ of Reuters. I had referred to his piece in the link above.
In October 2014, this is what I had written:
In other words, in the course of 2015, India should be prepared for a substantial yuan depreciation, which extracts only symbolic condemnation but no significant international condemnation or sanctions. [Link]
That piece is worth a re-read to understand how the rest of the world, particularly, the United States, is likely to react to Yuan devaluation. It will be interesting to watch if the prognosis made in that paper comes true. If it does, it would be bad news for India and the rest of East Asia.
Andy Mukherjee wrote this morning, after the news broke:
It looks increasingly likely that the Chinese authorities would not mind if market forces squeezed the yuan of some of its unbearable strength. If that preference for a weaker currency became a more sustained campaign of devaluation, the rest of the world may have no choice but to respond in kind. [Link]
I am not complaining that the price of gold per ounce has gone above USD1100 on the news.