Is China Losing Control of The Yuan? Why Will Humpty Dumpty Have Great Fall After 2 Decades?
Humpty Dumpty sat on a wall,
Humpty Dumpty had a great fall.
All the king's horses and all the king's men
Couldn't put Humpty together again!
1. The yuan-dollar exchange rate could decline by between 10% and 20% in 2016. The yuan-dollar peg -- a marriage of convenience that has been the anchor for the global growth model for the better part of the past two decades -- is now headed for a messy divorce. There are a number of reasons for why this is likely to happen this year; and it may happen sooner rather than later.
2. Look closely and the signs are all around -- from the crash in the price of commodities including oil to the crash in the China stock market -- caused by the slowing Chinese economy as well as a perfect global storm including the rising US Fed interest rates; lifting of sanctions on Iran; and the proxy wars underway between Saudi-Iran and NATO-Russia in Syria and elsewhere.
3. China’s biggest challenge for 2016 may yet turn out to be one of the key instruments that helped enable its rapid rise as a global export powerhouse: its currency.
4. In 2015, the International Monetary Fund (IMF) integrated the yuan, into the basket of elite global currencies or Special Drawing Rights (SDRs) that it uses to track its members’ reserves and issue loans. This means that the Chinese yuan must become more convertible and in order to do that it is likely to devalue significantly.
5. Make no mistake: Chinese companies and citizens are desperate to diversify their own holdings into currencies beyond their own, but are hampered by various government-imposed controls.
6. As much as $3 trillion could seek to exit the country, if it would be allowed to do so, and nearly $1 trillion flight of capital has already ocurred since 2014, especially as the Chinese stock market tanked in the summer of 2015 and then again in early 2016.
7. China, given the yuan's semi-peg to the American dollar, was forced to import US monetary policy perhaps more absolutely than others post 2007. Chinese debt has quadrupled since 2007 and its debt to GDP ratio has risen significantly above that of the US and many other advanced countries. This is unsustainable unless GDP growth continues to remain significant and does no slow down. The one mechanism to boost growth is to devalue the currency significantly.
8. Last week the CHY or Chinese Offshore Yuan's HIBOR or Hong Kong based Interbank Offered Rate spiked overnight to 66.82 percent or 6,682 basis points before falling again. That is a colossal number given the main bank base rate set by the People's Bank of China which is relatively nominal at 4.35 percent!
9. To those who consider this spike of several thousands of basis points to be normal, or business as usual, we say think again! Think very carefully about the consequences for a normal business -- not the speculators -- when a central bank causes inter-bank operational rates to spike thousands of basis points above normal. The normal businesses can no longer function and could be singed or destroyed during that scorched earth policy.
10. It would appear that China's central bank in particular and the world at large have forgotten the lessons of sterling pound's ejection from the Exchange Rate Mechanism (ERM) in 1992 or indeed the lessons of the Asia Financial Crisis which led to the collapse of Long Term Capital Management (LTCM) just before the turn of the century in 1998. All the king's horses and all the king's men...
11. A 10+% devaluation of the yuan would be the biggest drop in its value since 1994, the year Beijing decided to bring in the yuan-dollar peg and then held the value of the currency extremely steady for over a decade until 2005. The yuan has actually strengthened in general over the past decade. Yet all that may be about to end as the messy divorce takes place with the US dollar.
12. Watch the Chinese offshore Yuan (CHY) rate differential with the Chinese onshore Yuan (CNY) and the overnight Hong Kong Interbank Offered Rate (HIBOR) as a barometer of how bad the trouble is getting on the imminent yuan devaluation front. Those who say it doesn't matter don't know their history and are condemned to repeat it.
13. As a passing thought, have you heard of the Trilemma? If not, hunker down and read about it. All will be revealed in glorious Technicolor why the yuan devaluation is inevitable.
[ENDS]
What are your thoughts, observations and views?
Industrial Designer l Product Solutions |Simulation Engineering I Product Engineering Architecture |Creative Design |
8 年Maybe people should cast no romantic illusions ..a farmer does not grow more then He can personally use due to alturism ..he does it because He can profit ..as every country does,they look out for their own first..
Industrial Designer l Product Solutions |Simulation Engineering I Product Engineering Architecture |Creative Design |
8 年a basic surely would be GDP per capita against debt in consideration of reserves that would give some idea of the cost base against what could be invested ..the growth potential.
For long I have been telling my friends that China can not maintain the growth steam. The Fundamentals were never in place.Beside this China have other problems. Making few point based on basic economical/ social/political factors:- 1. China lacks transparent governance 2. It doesn’t have natural allies without which it’s difficult to survive politically/economically in long run. And mind you this is very critical. 3. Unlike US, it lacks R&D. Still maximum inventions happen only in developed countries. China for time being is only concentrating on mass production. 4. No country can progress without freedom of speech and expressions- this is a very basic thing . its the humans only who has to contribute towards socio/economic/political progress. Over all, basics are not in place. But time will only tell. ?
Agreed Jason. The point is that it really needs to happen. It seems to me that the issue is not about ￡, €, Yen and RMB. It is about the US$. It needs to go up.
Diriyah Gate - Director of Landscape and Public Realm
8 年The RMB has been very overvalued for years. It was in lock-step with the US$, and way too strong. It is just finding its trading range. This sort of thing is always turbulent.