Puppet on a string

On August 17 – a day short of a week after China had devalued adjusted the currency by 1.9%, I wrote the following:

It is more likely the first instalment because China’s prodigious capital outflows preclude drastic moves in one stroke. A large devaluation would cause panic and the ensuing capital outflow would be impossible to arrest, let alone reverse.

If this move threw the US Federal Reserve off the path of raising the funds rate in September, it is a bonus for China. It has more short-term external debt than many recognise—around 9% of GDP. Morgan Stanley thinks that such a level normally raises the risk of a crisis. Hence, any rate hike by the Fed raises the cost of servicing a trillion dollars worth of foreign debt for China. [Link]

They got their bonus! Mission accomplished.

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