All the noise on the yuan

There is more noise than information on the Yuan. Let us catalogue some good comments here:

(1) There is a Q&A in the FT. That is quite helpful. May be behind a subscription firewall.

(2) I am amazed by this piece in ‘Australian Finance Review’ – China told Fund managers in June that it would not devalue. So?  Is it cast in stone and why? Has not China broken promises and policy pledges before? Has the Chinese economy improved or worsened since then? What did the stock market sell-off and the manic-panic reaction tell us?

(3) Professor Christopher Balding has a good post here. Concluding lines say it all:

Beijing is running out of credible options to solve its problems and there are no good options remaining, only less bad choices.

(4) He had a post earlier on 11th August. These points are worth mentioning here:

Think of this as a true beggar thy neighbor competitive devaluation….. The market is unlikely to be satisfied with 2% and the PBOC just reduced its credibility by surprising the market…..There is absolutely a lot more weakness and building pressure on all these markets.

(5) This article is worth a read for these comments. Comic interlude.

The devaluation may be an attempt to make trading more open and market-based, observers said.

“I don’t think this is a reaction to the weak trade data over the weekend, I think it’s because of the SDR,” said Zhou Hao of Commerzbank in Singapore. “They need to have a market-based mechanism and they need volatility.”

(6) George Magnus has a good comment in FT:

This is unlikely to be a one-off move and the new currency-setting regime will surely be tested by more uncertain currency markets…. As with many other areas of economic reform, actions speak louder than words.

(7) Patrick Chovanec does not need translation. He lays it bare in FP. He also had an interesting tweet that blew away this new-found respect for the market:

When you intervene to prevent a currency from rising, then don’t intervene when it wants to fall, that is *not* a market determined rate.

(8) Apparently, Citi economists think that five provinces are in recession and yet national growth rate is at 7%?!

A research note from Citi published earlier this week forecast further stimulus measures from Chinese authorities, with five provinces believed to have shrinking economies.

“There is a widespread acknowledgement of the economy’s weakness, and three resource-oriented provinces in north-east China – Liaoning, Jilin and Helongjiang – are thought to be in recession already, along with north China’s Hebei and Shanxi provinces,” the analysts wrote.

However, they noted that slowing Chinese growth had not translated to surging unemployment.

“It is difficult to detect any sense of crisis, maybe because the government seems to be more successful in generating jobs than in generating increases in GDP: 7.2 million jobs were created in the first half of 2015, which sits comfortably with the full-year target of 10 million,” they explained.

Perhaps this dichotomy between job creation and growth helps to explain why the rest of the world seems more panicked about China than China does.” [Link] – Emphasis mine.

Oh, yes. I completely missed the calm reaction to the stock market rout in July. Also, forgot that they reversed their curbs on local government borrowing out of conviction and courage and not panic.

(9) Just to be sure,

Chinese consumers bought the fewest passenger vehicles in 17 months in July, extending a slump in the world’s largest auto market as deeper discounts failed to revive demand… The level of discounts is ‘shocking’ [Link]

(10) Izabella Kaminska has a post in FT Alphaville. Worth a read. This is the important point she makes:

So the idea this is all about SDR inclusion is a ruse, a means for China to signal to the world it has liberalized capital inflows as a concession, not as a necessity. A concession that would end up easing balance of payment pressures without the PBOC having to admit that they need it.

This is the comment I posted on her blog:

It is not clear how this move by PBoC is a ‘concession’ (or necessity) to attract capital inflows. Doesn’t it depend on expectations (or not)of further depreciation? If this ‘one-off’ move fuels expectations of further depreciation, the opposite would happen. Capital account deficit would worsen.

China has reneged on many other promises on market liberalisation. LGFV have been allowed to borrow again and that too in foreign currencies. Their manic stock market intervention is all too recent for investors to take any Chinese government agency’s words at face value. The timing, in that sense, is strange – coming right after the government intervention in stock markets turned the market into a mockery.

Tyler Cowen (‘Marginal Revolution’) had it dead right. Things are far worse than what the government has been willing to let on or outsiders have been willing to write about. It is a desperate first move and why would anybody expect the authorities to admit to both – that it is a desperate move and the first of the many moves, down the road.

I will concede this much: they may be hoping that it is not so and that it is one-off. But, hope is neither a policy nor a promise.

(11) Yes, Tyler Cowen’ short post was crisp and homed in on the real issue. Reflect on this point:

4. A panicky flight of capital still is not the most likely scenario for China.  Still, the chance of that scenario just went up, and the leadership knows this, thus the negative signal about underlying economic conditions.  That exchange rate “currency wars” stimulus really must be needed.

(12) This is an email I had sent to my friend Chris Wood on his ‘Flash’. Cannot post what he sent but you can infer that from my comment below:

You and your colleague may well be underestimating the desperation in the economy. Their manic-panic reaction to the stock market decline showcased their desperation magnificently to the world. Yet, for you to retain your view from the beginning of the year – “China will only be prepared to see up to a 5% devaluation this year in the context of a rising US dollar since a bigger devaluation would risk undermining the strategic goal of building a consumption-driven economy” – without acknowledging that the view has suffered a few knocks takes me by surprise.

Think about it: What if China correctly guesses that it is ‘too big to fail’ in the eyes of the US and hence it can get away with going back on its policy promises, due to short-term desperate situation? Didn’t they go back on what they would do with LGFV borrowings? They relaxed quite a few restrictions in May this year.

The fundamental legitimacy of the Communist Party is economic growth. That is in serious jeopardy. Hence, this is CCP thinking now, in my view:

Consumption-driven economy can wait. We have to be seen as trying for restoring growth. Without that, the Party faces an existential threat. The world will have to grit and bear the consequences. Op.-ed. writers and investment strategists can write what they want.

(13) Andy Rothman asks the question and dismisses it – on China’s housing crash. Not surprised.

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3 thoughts on “All the noise on the yuan

  1. The international monetary system is about to be dramatically changed. Possibly irrevocably. In this context, I am afraid, India and Indians are too pre-occupied with Vyapam, Modi-gate, etc., etc. And the thoughtful commentariat is pre-occupied with either the monetary sins of “the west” or going on and on with the merits of entering the UN security council, on which front the government (Congress- or BJP-led) has little to show for.

    We do not even know, at least I do not, if the RBI has any CNY (or CNH) exposure in its FX reserves. Chances are it does not. India is one of the few countries with which PBOC does not have a CNH swap line and the bilateral trade deficit is a complete disaster with India’s services exports being effectively blocked off and the merchandise balance skewed hugely in China’s favor, with little Chinese FDI to finance this deficit.

    This in itself should make India content with a $-led trade settlement regime and reserve currency arrangement, in my humble opinion. On the other hand, the Chinese approach seems to be to aggrandize as much international clout as possible whilst relinquishing as little internal control as possible and nobody that I know of in India has voiced a nary of caution or opposition.

    The only scant consolation from all this could be that the IMF decides to only offer a miniscule SDR weight to the RMB, well short of China’s global trade share as ‘free-usability’ remains retarded. That’ll give India a bit of breathing space — notwithstanding the stunning silence from Mint Street and North Block.

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  2. Hi Ananth,

    I think the nub of the issue is sdr entry. In this regard, Kaminka’s piece is a gem… the ruse is that they’re making it seem like they’re making a concession when in fact they need sdr just as bad or even more.

    The broker research commentary I come across on a daily basis, on SDR entry, sees this re-shaping of the monetary order as a done deal, or a matter of when rather than if. That may be true, but a much longer track record of a reformed CNY fixing is needed, and not just a few days or weeks or moths of experience.

    Besides, there are still no real onshore hedging options avl. What’s more, why should a reserve currency even have a parallel currency (the CNH?) Additionally, if even HK hasn;t accepted CNY as part of its currency basket given its subordinate sovereignty vi-s-vis the mainland, then why on earth should the rst of the world accept CNY in their basket of reserves is beyond me.

    I wonder where you stand on this from an Indian strategic standpoint? I know you’re no fan of the current global monetary order and global central banks’ QE, and all that. But should India acquiesce to SDR entry for RMB?

    India has been wanting to be in UN permanent council for a long time. China has dragged its feet, if not outright blocked it. The trade relationship has also soured dramatically.

    India (Rakesh Mohan) wields 2.8% of votes at executive board of IMF on behalf of itself and rest of subcontinent (minus Pak.). This may not be much to forestall RMB entry into SDR under regular circumstances (70% of votes at Exec Board). But if the EB decides that fundamental pricnciple changes are required, and which calls for 85% agreement, then India’s 2.8% vote share will count for a lot. The other critical members’ votes are 6.2% with Japan, and 16.7% with the U.S.

    The Chinese seem to want entry first, and then promise to prod vested interests toward further/deeper reform only later. This smells like wto entry in 2000-01 all over again. The world accomodates them, and then they eat everyone’s lunch.

    In this context, I personally can’t see any good strategic or tactical reason why India should acquiesce to conferring exorbitant monetary privilege to China, when some basic and core national intersts are so sharply divergent.

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    1. Thank you, Andy, for a very detailed and very insightful post. Thank you very much. I have not thought much about whether India should acquiesce in China being admitted to SDR. But, as you point out, some strategic thinking is required, there. Well said.

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