More government intervention by the Chinese (sound familiar?) and this time it’s in their currency rather than their equity market. The PBC today released on it’s website a stunning literacy of how it’s going to improve the central parity rate of the RMB against the US dollar. It has to be a language translation issue at play here because the information provided is little more than explaining what took place after the depreciation. It’s like they were providing color commentary on what took place and laying the blame on the strong US dollar and impending interest rate hike by the FED. I’m no China expert but I think that there are several key takeaways from this abrupt departure from the norm.
Firstly, let me say that I can’t get too excited about a 1.9% move in the currency market. It’s noteworthy because it’s a ‘managed float/fix’ and one of the largest by the Chinese but 1.9% is hardly worth worrying about when we have seen a 30% move in the Swiss franc versus the US dollar this year (what a disastrous SNB decision “Swiss Cheese of a Policy Exit” ). Yes, everyone is rightly worried that this will set off round after round of devalue thy neighbor in Asia, but in the land of depreciations, 1.9% is not a big deal overall.
Secondly, as China attempts to stem its economic downturn by easing credit and buying equities (who said that?), a devaluation of its currency should help it achieve its goal. For an export led economy, this makes complete sense. The problem I have is that 1.9% isn’t going to move the needle. Competitive devaluations need to be in the region of 15%-20% to have a significant impact on an economy of that scale. A move of this magnitude would wreak complete financial mayhem on their neighbors (the Chinese don’t really care about their neighbors) and send shock waves to every corner of the global economy. I personally don’t see China doing something so drastic as this as they have been too measured in their planning and execution of the central economic policy to date.
Lastly, a move such as this strikes me as being somewhat panicky and I can’t help but wonder if the Chinese have more downside risk to their economy than they previously let out. My cynical take on this (shock!) latest episode by the Chinese is that this is a CYA policy attempt. I suspect that the regulators who were read the riot act by Li Keqiang last week to get their act together are pulling out all the stops to keep their jobs (stay out of jail) by producing a media blitz about the yuan. It certainly wouldn’t be the first time that someone has created a news story to deflect attention away from the real mess, which is a Chinese equity rout that threatens their entire populous.
ACurrencyAffair.com – quick, discreet, and so worth the risk.