Will the 2020’s be a decade of currency devaluations?

Sometimes financial markets set the agenda for the week and as this week began they did so as the Renminbi ( Yuan) of China passed what some might call lucky number 7. The New York Times has put it like this.

The renminbi traded in mainland China on Monday morning at roughly 7.02 to the dollar, compared with about 6.88 late on Friday. A higher number represents a weaker currency. The last time China’s currency was weaker than 7 to the dollar was in 2008, as the financial crisis mounted.

In itself a 0.01 move through 7 is no more significant than any other. But that would be in a free float which is not what we have here. Also there has been a move of the order of 2% in total which is significant for an exchange rate which is both closely watched and would be more accurately described as a sort of managed free float. Anyway you do not have to take my word for it as in a happy coincidence the People’s Bank of China has been explaining its position.

China implements a managed floating exchange rate system based on market supply and demand with reference to a basket of currencies. Market supply and demand play a decisive role in the formation of exchange rate. The fluctuation of RMB exchange rate is determined by this mechanism . This is the proper meaning of the floating exchange rate system. From the perspective of the global market, as the exchange rate between currencies, exchange rate fluctuations are also the norm.

There are more holes than in a Swiss Cheese there as we observe an official denial that China has done this deliberately.

Affected by unilateralism and trade protectionism measures and the imposition of tariff increases on China, the RMB has depreciated against the US dollar today, breaking through 7 yuan, but the renminbi continues to be stable and strong against a basket of currencies. This is the market. Supply and demand and the reflection of fluctuations in the international currency market.

The PBOC clearly does not follow UK politics as otherwise it would know “strong and stable” means anything but these days! For example  the Reminbi has fallen by 1.8% versus the Japanese Yen if we stay in the Pacific and by 1.7% versus the Euro if we look wider.

Time for a poetic influence

I regularly report on the rhetoric of central bankers but I am not sure I have seen anything like this before.

It should be noted that the RMB exchange rate is “ breaking 7” . This “7” is not the age. It will not come back in the past, nor is it a dam. Once it is broken, it will bleed for thousands of miles. “7” is more like the water level of the reservoir, and the water is abundant. The period is higher, and it will fall down when it comes to the dry season. It is normal to rise and fall.

Perhaps the online translator does not help much here but there is a lot more going on than for example the English translation of the Japanese government always being “bold action” for the Yen.

Up is the new down

If your currency is falling then the obvious “Newspeak” response is to suggest it is rising.

In the past 20 years, the nominal effective exchange rate and the real effective exchange rate of the RMB calculated by the Bank for International Settlements have appreciated by about 30% , and the exchange rate of the RMB against the US dollar has appreciated by 20% . It is the strongest currency among the major international currencies. Since the beginning of this year, the renminbi has remained in a stable position in the international monetary system. The renminbi has strengthened against a basket of currencies, and the CFETS renminbi exchange rate index has appreciated by 0.3%

However if you are telling people this is due to the market it might be best to avoid phrases like “control toolbox,”

In the process of dealing with exchange rate fluctuations in recent years, the People’s Bank of China has accumulated rich experience and policy tools, and will continue to innovate and enrich the control toolbox.

So let me finish this section by pointing out that the PBOC has “allowed” the Reminbi to go through 7 this morning in response to something we noted on Friday.

Trade talks are continuing, and…..during the talks the U.S. will start, on September 1st, putting a small additional Tariff of 10% on the remaining 300 Billion Dollars of goods and products coming from China into our Country. This does not include the 250 Billion Dollars already Tariffed at 25%…

As the Frenchman puts it in the Matrix series of films.

action and reaction, cause and effect.

Bond Markets

One immediate impact of this has been that bond markets have surged again and we are reminded of my topic on Friday. The totem pole for this has been the bond or bund market of Germany where we see two clear developments. Another record high as the ten-year yield falls to -0.52% and as I type this the whole curve has a negative yield. Over whatever time span you choose Germany is being paid to borrow.

Japan

I do not envy the person who had the job of explaining market developments to Governor Kuroda at the Bank of Japan daily meeting. Firstly the Yen has surged into the 105s versus the US Dollar which is exactly the reverse of the Abenomics strategy of Japan. Then there was the 366 point fall in the Nikkei 225 index which is not so welcome when you own 5% of the shares on the Tokyo Stock Exchange. At least the trading desk will have been spared the job as they will have been busy buying the 70.5 billion Yen’s worth of equities that are typically bought on down days like this. This is neatly rounded off by the Japanese Government Bond market not rallying anything like as much as elsewhere due to the “yield curve control” policy backfiring and providing a clean sweep.

Oh and the day of woe was rounded off by the South Korean’s buying much fewer Japanese cars.

Switzerland

Regular readers will recall the period that I labelled the Yen and the Swiss Franc the “currency twins”. Well they are back just like Arnie and in fact with a 2.2% rally against the Renminbi it is the Swiss Franc which is the powerhouse today. It has rallied against pretty much everything as we remind ourselves of the last policy statement of the Swiss National Bank.

The situation on the foreign exchange market continues to be fragile. The negative interest rate and the SNB’s willingness to intervene in the foreign exchange market as necessary remain essential in order to keep the
attractiveness of Swiss franc investments low and thus ease pressure on the currency.

Well they were right about “fragile”. Do not be surprised if we see the SNB intervening again which will be further bullish for overseas bond and equity markets as that is where they invest much of the money.

Mind you equity markets are falling now meaning this from last week is already out of date.

SNB‘s pile of U.S. shares hits a record $93 billion on buoyant markets ( Bloomberg)

The Ashes

As I hope that England’s sadly rickety batting order can resist the pressure from a land down under today I have been mulling something else. Both countries have weak currencies at the moment and are perhaps singing along with Level 42.

The Chinese way
Who knows what they know
The Chinese legend grows

I could never lie
For honour I would lie
Following the Chinese way

 

Comment

Just like in the 1920’s will the 2020’s open with some competitive devaluations?

President Trump seems to quite like the idea if his tweets are any guide. In the Euro area we see a central bank that seems set to follow policies which in theoretical terms at least should weaken the Euro although the ECB is swimming against the trade surplus. I have covered the Swiss and the Japanese. So let me leave you with two final thoughts.

In the confused melee has the UK stolen something of a march?

Is there a major economy who wants a stronger currency?

Podcast

 

 

 

 

 

Signs of trouble in China are to be seen in the Yuan ( Renminbi ) rally

As 2017 opens we find ourselves regularly looking east and today it is the turn of China to attract our attention. There is much going on both above and below the surface but let us begin with the good news part. So far the Chinese economy continues to grow if the Markit business surveys are any guide and it looks as though there has been a pick-up. On Tuesday we were told that the manufacturing sector was doing well.

Manufacturing companies in China reported the strongest upturn in operating conditions since January 2013 at the end of 2016. Production expanded at the fastest pace in nearly six years, supported by a solid increase in total new work.

If we focus in on reported output then the figures were even better.

Notably, the rate of output growth accelerated to a 71-month high, with a number of panellists commenting on stronger underlying demand and new client wins. This was highlighted by a sustained increase in new business during December

There is always an oddity in the Chinese numbers and what I mean by that is small PMI reading changes – the latest number was up to 51.9 – seem to have a much larger effect than elsewhere. For example the official manufacturing statistics show growth of around 6% in 2016 from PMI numbers that in the western world might indicate 0.6% growth.

The two worries in the report were a fall in employment which is odd with such output growth and a familiar rise in input costs of which the symbol is the higher price for crude oil.

Services

This morning there was good news to be found here as well.

The headline Caixin China General Services PMI was up 0.3 points from a month ago to 53.4 in December. The sub-indices of new orders, input costs and prices charged all went up.

This meant that the overall picture was positive as well.

Moreover, the Composite Output Index posted up from 52.9 in November to a 45-month high of 53.5 at the end of 2016. China ended 2016 on a positive note, with both manufacturers and service providers seeing stronger increases in business activity compared to November.

Thus we see some good news and the likelihood that the official economic target of 6.5% economic growth will be declared seems high.

Pollution

Here is one clear problem if you will forgive the malapropric effect of the word clear in these circumstances. Over the holiday break I noted pictures sent from China that were reminiscent of the film Blade Runner in the way that the air was polluted. Added to it was this from mrtoga yesterday in a reply to the Financial Times.

I am sitting in Beijing today and the PM count outside is at 529.  Might be the most hazardous day of this winter.

He seems to think that Shanghai is better although some have replied from there that they are not so sure! We need to find a way of putting such a level of pollution into the GDP (Gross Domestic Product) numbers as a subtraction and not as an addition ( via any clean- up costs). What is the price of having to do this?

How realistic is this?

Whilst we should have a slice of humble pie due to problems with western data there has to be an issue with declaring 6.5% GDP growth with this. From the Financial Times.

“In 10 to 15 years, China’s demographic decline will become more prominent, and the labour force will be declining by about 5m people per year,” says Brian Jackson, senior economist at the Beijing office of IHS, a consultancy.

So as the demographic decline begins to build-up we are simultaneously seeing high rates of growth? Productivity must be surging as opposed to the malaise seen by the capitalist imperialists.

Debt

The numbers from the FT tell their own story as ever more seems to be required to keep the game alive.

China’s total debt load had reached 255 per cent of GDP by the end of June, up from 141 per cent in 2008 and well above the average of 188 per cent for emerging markets, according to the Bank for International Settlements.

The Monetary System

We are seeing issues arise this year or more accurately a continuation of past ones. Let us start with the value of the Yuan/Renminbi today. From Bloomberg.

China’s efforts to choke capital outflows are beginning to pay off, with the offshore yuan surging the most on record as traders scrambled for a currency that’s becoming increasingly scarce outside the nation’s borders.

The yuan gained 1 percent at 2:53 p.m. in Hong Kong, taking its two-day move to 2.3 percent, the most in data going back to 2010.

There are two Chinese currencies the onshore and offshore and this squeeze has widened the gap between them. What we are seeing is an attempt by the Chinese authorities to “burn” those who are in their opinion trying to push the Yuan lower too quickly. There have been various official moves of which the first warning sign was the change in the trade-weighted basket from 11 to 24 currencies then others appeared.

Bloomberg News earlier reported Chinese policy makers were encouraging state-owned enterprises to sell foreign currency………Policy makers in Beijing have recently taken a slew of measures to tighten control of the currency market, including placing higher scrutiny on citizens’ conversion quotas and stricter requirements for banks reporting cross-border transactions.

Higher Interest-Rates

Some chilling numbers are being reported by Bloomberg.

Overnight yuan deposit rate jumps to 80% in Hong Kong

Actually Reuters have it at 96% but a lot of care is needed with annualised overnight numbers. But as we return to earth we do note a difference to the falls we saw at the end of the year in much of the western world due to in essence a lack of demand for money.

In other signs of yuan scarcity, HSBC Holdings Plc raised its three-month yuan deposit rate to 2.85 percent from 1.8 percent, according to the Oriental Daily……

In a world where it is news that US Libor has reached 1% that is relatively high.

Comment

Some of what we are observing is normal for China in that in the gap between our New Year and their they squeeze the exchange-rate. However whilst some of the economic signals are good there are clear dangers in doing this sort of thing. Whilst China may be happy to punish foreign currency speculators there are problems with affecting borrowers with higher interest-rates. The lesson of the credit crunch era is that such things can have big impacts.

Meanwhile it would appear that I am not the only person wondering ( see my post on the 29th of December) about the involvement of Chinese capital in the recent rise and rise of Bitcoin.

Capital flight anyone? That only means that the current Yuan rally looks set to be a type of Pyrrhic victory.

TipTV Finance

Here are my views on the Bank of England from yesterday.

 

http://tiptv.co.uk/will-higher-inflation-force-central-banks-raise-rates-not-yes-man-economics/

 

 

 

 

Currency movements are the major players in monetary policy now

One of the features of these economic times is the way that we get so many denials that monetary policy is pretty much impotent. We of course know what to do with official denials. But whether you choose interest-rates or longer-term yields via QE ( Quantitative Easing) there is now the obvious issue that 8 years or so of what have been extreme moves have not produced the “escape velocity” of Bank of England Governor Mark Carney. However movements in exchange-rates have retained quite a bit of power albeit that there is always an element of robbing Peter to pay Paul about them. What I mean by this is that a currency rises or falls against another one which means that overall it is a zero sum game with the losers matching the winners. Or at least at the first stage it is as in our increasingly centrally planned world all movements seem to cause trouble. But as ever we see much going on in the currency markets.

China

For those unaware something I have mentioned in the past took place at the beginning of this month which was this. From the International Monetary Fund.

The Board today decided that the RMB met all existing criteria and, effective October 1, 2016 the RMB is determined to be a freely usable currency and will be included in the SDR basket as a fifth currency, along with the U.S. dollar, the euro, the Japanese yen and the British pound.

This does have real effects as for example some countries are likely to use it as a benchmark for foreign exchange reserve holdings. So we may see more demand for the Renminbi and we may have seen the biggest shift of all which is the SDR of the IMF increasing in importance. From Bloomberg at the beginning of September

The World Bank issued 500 million SDR units ($698 million) of three-year notes in China’s interbank market this week, the first sale of debt in the International Monetary Fund’s alternative reserve assets since the 1980s.

So we see that the US Dollar is facing potential challenges from both the Chinese Renminbi and the SDR of the IMF. Although care is needed with the latter as one bond issue will not cause sleepless nights!

However we did get a flicker of response as the other currencies in the SDR basket needed to be reduced to let the Renminbi in and they ( Euro, Yen and £) were except for the US Dollar which was nearly unchanged ( 41.9% to 41.73% compared to 37.4% to 30.73% for the Euro).

Today

However rather than strength we saw this today according to Reuters.

The currency fell after the People’s Bank of China set the midpoint CNY=PBOCat 6.7008 yuan per dollar, its weakest fix since September 2010 and about 0.3 percent weaker than the setting on Sept. 30, before a one-week National Day holiday.

Just for comparison it has dropped from 6.33 to the US Dollar a year ago. Meanwhile it now buys 15.4 Yen rather than the 19 of a year ago which will focus attention in Tokyo.

The official view admits only a minor depreciation.

On August 31, 2016, the CFETS RMB exchange rate index closed at 94.33, losing 1.06 percent from the end of July;

It is now 94.07.

The Euro and the Yen

These are places where expansionary monetary policy was designed to reduce the value of the respective currencies albeit that one was explicit (Yen) and the other implicit (Euro). However more recently both have seen their currencies go through stronger phases in spite of both negative interest-rates and large-scale QE programs.

Overnight they have been echoing each other.

BOJ’s Kuroda: BOJ may delay hitting inflation target to 2018 ( @DailyFXTeamMember )

Draghi: Euro zone inflation could approach the ECB’s target by late 2018 or early 2019 ( Reuters)

Actually if you look at the surge in the value of the Japanese Yen in 2016 then it is it which is the furthest away from getting anywhere near its inflation target. But in the debates over possible reductions in unconventional monetary policy or “tapers” seem moot in comparison to this reality. Accordingly both will being trying to have lower currencies except after inflation success we saw one rebound strongly and the other stop falling a rebound a little.

Saudi Riyal

It gets only a small amount of attention but there are more than a few signs of stress in the financial system of Saudi Arabia right now. The issue of the lower oil price is clearly the main game in town but its effects have been added to by this. From the Saudi Arabian Monetary Authority on the 12th of August.

With regard to media news about the riyal exchange rate policy, SAMA Governor would like to reiterate SAMA’s commitment to maintain the current riyal exchange rate at SAR3.75 per USD, and that bets on the riyal on futures market are based on incorrect information.

So a fixed exchange-rate to the US Dollar with all the inflexibility that it provides which includes a currency which has appreciated at a time of economic difficulty. Not the type of “masterly inaction” so beloved of the apocryphal civil servant Sir Humphrey Appleby. We see an exchange-rate which is too high combined with speculation against the currency creating uncertainty.

Nigerian Naira

This years heavy faller in exchange-rate terms has been Nigeria where I note that in late July Bloomberg noted that it had passed 300 to the US Dollar for the first time in late July. Let is now skip to Bloomberg’s report from Friday.

with the central bank holding the naira in a tight range around 315 per dollar since the beginning of August.

So not much change? Er no.

Most local businesses and Nigerians going abroad can’t get foreign-exchange from their banks and have to turn to the BDCs, which have more leeway in setting prices, and black-market street-traders openly plying their services across the country. They sell each dollar for around 475 naira, compared with 425 in mid-September.

Oh so in reality quite a lot of change then. Two exchange-rates at the same time lead to an economy signing along with Earth Wind & Fire.

Take a ride in the sky
On our ship, fantasize
All your dreams will come true right away

On a wholesale level it is possible to get foreign exchange from the Central Bank of Nigeria except it then wants to know where you got the money from.

UK Pound

I have covered the details of this on more than a few ocassions but merely to say that the UK Pound £ has joined the ranks of the currency depreciators in 2016 with an obvious acceleration post the EU leave vote. Let me add that if you change your money up at an airport it will feel like the UK has two exchange-rates as well.

Comment

There is much to consider in what were some 6 years ago labelled “currency wars” by the then Finance Minster of Brazil. Of course its fortunes have turned downwards since then as we note how things can turn. There are big economic impacts from currency moves as we observe the later effects on both growth and inflation.

There is also the issue of yet another central planning failure as markets which increasingly only exist to front-run central banks get less liquid and this now seems to also apply to the previously relatively highly liquid currency markets. The Financial Times has these examples today.

The biggest flash crash of recent times was in January last year with “frankenshock” — when the Swiss franc jumped nearly 40 per cent against the euro and the dollar.

The New Zealand dollar lost more than 2 cents against the US dollar amid last August’s market turmoil over China growth fears. The South African rand fell 9 per cent against the US dollar in a mere 15 minutes in January this year.

To that we can add the UK Pound flashcrash of Friday morning. However the Financial Times sadly cannot resist its party line by publishing a quote that there were no buyers of Sterling at all. Yet it is now as I type this some 6 cents higher than the low. Did it just levitate?

 

 

 

 

What is the UK’s economic relationship with China?

Today sees the start of the state visit to the UK by the president of China Xi Jinping and the UK government is certainly providing red carpet treatment for him both literally and figuratively. It would appear that the relationship between the two countries is shifting and in overall terms I welcome that as the UK establishment has for too long stared myopically at Europe to the exclusion of pretty much all else. We have long needed a more global strategy and one which realises that the economic axis of the world shifted towards the Orient and Pacific some time ago. However there are issues here as doing something does not necessarily mean doing the right thing and also one is dealing with an authoritarian regime with a poor human rights record. Sadly there is rarely a shortage of them.

The UK’s current economic relationship with China

Let us first look at where China stands as a UK trading partner. We do not have to look far down the list of exporters of goods to us as China is at number 2 on that list. If we look at 2014 we see that we imported some £37.3 billion of goods from China or 8.9% of our total. So immediately we learn that the UK has importance to China as a provider of demand for its goods.

The other side of the trade balance sheet is how much we export back in return and that immediately provides some food for thought as we export back some £15.5 billion of goods or 5.3% of our total exports. So again we find ourselves as not only gross contributors to Chinese output but net ones too as our trade deficit in 2014 was £21.7 billion.

If we look back we see that the trade deficit has been reasonably constant over the past three years and this represents progress. This is because our exports being much smaller have increased at a faster rate (37%) than our imports from China (17%). However it would appear that 2015 has seen a change in that and it is not what you would give red carpet treatment for as UK exports to China have fallen back. There were dips in both the first and second quarters of this year and this trend really picked up in the latest three months (to August). UK exports to China fell by some 16.4% on the previous three months and by some 18.4% on the same period in 2014.

So we have yet another sign of the economic slow down in China as we mull also the fact that in an economy like that they may also be sending us a message. Whatever the reason our trade position looks as though it is deteriorating further.

What about services?

These numbers are more out of date which is frankly a disgrace considering how important they are to the UK. But whilst we have a surplus with China it fell from £2.9 billion in 2013 to £2.2 billion in 2014 and in the first half of this year was only £1.01 billion. So we seem to be losing ground here too.

The Finance Sector

There is much talk of a boom for the UK here and there have been developments on this front. Back on the 22nd of June 2013 this was announced by the Bank of England.

Governor Zhou Xiaochuan and Governor Mervyn King have signed an agreement to establish a reciprocal 3‑year, sterling/renminbi (RMB) currency swap line. The maximum value of the swap is RMB 200bn. The swap line may be used to promote bilateral trade between the two countries and to support domestic financial stability should market conditions warrant.

The bilateral trade bit does not seem to be going so well for the UK anyway as we have just seen.Nonetheless we agreed to extend and increase it only last month although being a political decision the details are still vague.

The UK does have plans to be a centre for offshore Renminbi based trade. But the official statement from the 21st of September merely points that out as a fair bit would go through London anyway.

China recognises that London is one of the most vibrant and important RMB trading centres and offshore RMB markets…..London accounts for around 2/3 of all RMB payments outside of China and Hong Kong.

Today there will be some symbolism on this front as China issues a UK Pound £ denominated bond. From the Financial Times.

The People’s Bank of China will sell one-year bills with initial price guidance at 3.3 per cent, according to a term sheet seen by the Financial Times. The sale is expected to raise Rmb5bn (£509m),

We got there first as just over a year ago the UK government did this.

The UK government has today successfully issued a sovereign bond in China’s currency, the renminbi (RMB), becoming the first western country to do so and issuing the largest ever non-Chinese RMB bond.

It would not cover our balance of payments deficit for long would it? So mostly symbolic and let us hope that it remains that way as there is no particular reason for either sovereign government to borrow in the others currency.

Infrastructure Investment

This part of the arrangement is quite a can of worms. Ordinarily one would lay out the red carpet for foreign investment of the form of say Japan’s Nissan in Sunderland which turned out to be quite a success. But there are issues with this for example.

The UK has approved a Guarantee worth up to £2bn for Hinkley Point C, paving the way for Chinese investment in UK nuclear and helping secure the UK’s power supply into the future.

Clearly power and especially nuclear power is a strategic resource which in the past we have financed ourselves. Now we kick that particular football abroad to France and China especially and it does beg a question which can be simply expressed. Why?

One reason is simply the desire to manipulate the public borrowing and national debt figures as this is a type of off-balance sheet borrowing. Ironically it is more risky than borrowing ourselves as the risk is switched to a foreign currency which we seem to be guaranteeing! If I was in charge I would count it as public borrowing which would soon stop it.

Genuine investment like Nissan yes please, balance sheet obfuscation no thank you.

Steel

It is probably not a coincidence that so many UK steel operations are closing right now. Indeed yet more bad news has arrived this morning. From Bloomberg.

Tata Steel announced plans to shut three U.K. production facilities with around 1,200 job cuts…….The company said a shift in market conditions caused by a flood of cheap imports have led to the changes, and it also cited a strong pound and high electricity costs.

Who will get the blame for flooding the steel market with cheap imports? I think we know. Also though likely to be ignored is another issue which is that if you raise electricity costs due to green changes then you are at risk of losing business in industries which are price competitive.

Also this from Transport Scotland about the new Forth Road Bridge tells a familiar story.

The first fabrication is taking place at Crist in Gdansk, Poland which will produce 4,200 tonnes of steel to form the project’s massive caisson foundations. Around 8,500 tonnes for the steel bridge sections will be fabricated at Tecade-Megusa in Seville, Spain and 24,500 tonnes will be fabricated at Zhenhua Heavy Industries in Shanghai, China.

Comment

There is much to consider about the UK’s economic relationship with China. I welcome the fact that the UK establishment is taking more of an interest although there is of course an irony that we are doing so at not the best of times. But nonetheless China is an enormous population and potential market. The catch is that we need to plan what we do as they certainly will! There are issues around us importing infrastructure investment in issues of national security especially from a country with a reputation for cyber crime. Actually this is also a deeper issue as we import military equipment from the United States where it could do the same. Obviously the US has been our friend and ally for many years but that does not mean that we will be in agreement on everything.

In some ways we have been our own worst enemy as our consumption culture has sucked in cheap Chinese imports and flattered our inflation if not our trade figures. But we do have some power here as in a slow down this would be the last moment China would want to see a reduction in external demand.

As for the hopes of the UK establishment did T’Pau get it right all those years ago.

Don’t push too far your dreams are china in your hand

Also there was a moment of unintended humour in the last UK trade effort back in 2013. From the London Evening Standard.

David Cameron secures £45m pig semen deal between UK and China…..Exports of trotters could be worth as much as £7.5 million a year to industry in Britain.

The latter presumably does not mean Del-Boy,Uncle and Rodney….

China joins the Currency Wars as it devalues

One of the themes of this website has been that with other types of monetary policy being increasingly ineffective that exchange-rates have moved to the front of the pack. We have seen interest-rates cut to and sometimes below what was previously considered to be the lower bound but if such efforts were as effective as claimed we would not be where we are. Also I am reminded of the fact I noted yesterday which is that all 15 OECD countries which have raised interest-rates post credit crunch have since cut them! All sorts of extraordinary monetary policies have also been tried in some cases in the billions, in others in the trillions. However countries have increasingly tried to gain a relative advantage by lowering their exchange rate leading to this from Brazil’s Finance Minister back in September 2010.

We’re in the midst of an international currency war…This threatens us because it takes away our competitiveness.

The advanced countries are seeking to devalue their currencies.

Hence the Currency Wars theme which has seen an opening salvo fired this morning into the Pacific and perhaps the South China Sea.

China Devalues

Here is the statement for the People’s Bank of China or PBOC

Effective from 11 August 2015,the quotes of central parity that market makers report to the CFETS daily before market opens should refer to the closing rate of the inter-bank foreign exchange market on the previous day, in conjunction with demand and supply condition in the foreign exchange market and exchange rate movement of the major currencies.

It is a rather unwieldy statement to say the least! So this is what happened next according to Bloomberg.

The bank then weakened the midpoint to 6.2298 per dollar on Tuesday morning, compared with Monday’s 6.1162 fix – the biggest-ever one-day adjustment to the midpoint.

I note that Bloomberg has concerns over what this might mean going forwards.

Under the new method, market forces would have more ability to take the yuan lower in the weeks ahead,

As an aside there was for a while a fashion for calling the Chinese currency the Renminbi whereas the Yuan seems to have returned to some extent. So we have a lower currency and a new perspective from China.

Wasn’t it supposed to be appreciating?

This section is along the lines of this from Blueboy.

Remember me?

Let us go back to June 21st 2010.

the People´s Bank of China has decided to proceed further with reform of the renminbi (Yuan) exchange rate regime and to enhance the renminbi (Yuan) exchange rate flexibility.

Even for central bankers they are euphemistic! The Chinese currency was going to be allowed to rise against the US Dollar in response to arguments like this.

For those who do not follow the situation closely it has been considered for a while internationally and by the US administration that the Chinese Yuan is undervalued (estimates vary between 25 and 40%) and that this is one of the reasons for China’s Balance of Payments surplus and  a contributor to the American deficit.

Back then some 6.83 Yuan purchased a US Dollar and after today’s move to 6.23 we see that the total appreciation was just under 9% or nowhere near enough to correct the claimed undervaluation. However we need to think wider as the US Dollar has been rising meaning that an ever-growing list of currencies are undervalued against it. In May the Peterson Institute crunched the numbers resulting in this covering the year to April.

The most important changes were the large effective appreciations by the US dollar (about 12 percent) and the Chinese yuan (about 12 percent),

So we now find ourselves on a road where the Chinese currency is no longer undervalued and in fact on its way to correcting this has put a squeeze on the economy. If we switch to comparing it with its neighbours we see this.

Now we have rather a different perspective which is that China has been seeing a currency appreciation especially against its trading competitors as shown by the rise of the yellow line in that chart. Back in January 2014 FT Alphaville quoted this from Lombard Street Research.

But the situation now differs because the currency has become overvalued since 2011. The rebalancing from investment towards consumption given the overvalued yuan would be made easier if the currency is allowed to depreciate as capital flows are liberalised fully.

To put it another way China could not cope with the level of its exchange rate and there was trouble ahead. Since then the slow down in its economy has backed that up and now perhaps we are seeing an official response.

The currency devaluers

Another way of putting this is that devaluing or depreciating your currency is called exporting deflation. Now let us return to the Peterson data quoted earlier and see what it tells us about that.

and the large effective depreciations of the euro (about 11 percent) and the yen (about 8 percent).

If we take that a step further we see that two large currency blocs are devaluing from a position of strength in trading terms. The Euro area has a consistent current account surplus and whilst in recent times energy imports have pressurised Japan on this front it is hardly a serial deficit nation! So we are left with the thought that they and in particular Japan have exported deflation to China. When Abenomics turned Japan into a currency depreciation some 12.4 Yen bought one Yuan whereas this morning it took 20 of them. Quite a change is it not? It matters as the two countries trade together on a large scale.

Exports (referred to as China’s imports from Japan hereafter) increased by 0.3% to US$162.7 billion and imports also rose by 0.1% to US$181.0 billion. (Jetro).

Added to this is the fact that they will have more than a few industries that compete with each other for business around the world. So for China the plunge in the Yen caused by the policies of Abenomics have been a large issue and may well have been the straw which broke the camel’s back.

The International Monetary Fund

This has its own unit of currency called Special Drawing Rights or SDRs. These are based on the US Dollar, Euro, Yen and UK Pound £. An obvious issue is why not have China’s currency too and here are the thoughts of the IMF from last week.

The Chinese renminbi (RMB) is the only currency not currently in the SDR basket that meets the export criterion. Therefore, a key focus of the current review will be whether the RMB also meets the freely usable criterion in order to be included in the SDR basket.

There is much to consider here not the least that two of the current four ( Euro area and Japan) are indulging in large-scale Quantitative Easing operations to reduce the value of their currencies. Unless the basket is extended the UK may well find itself demoted.

For now the issue over the Chinese currency is the fact that it is plainly not “freely usable”.

Comment

It seems that a new front has been opened up in the currency wars campaign. The Chinese authorities will know that they have sent a signal here to the rest of the world and that there will be concerns that they are a new kid in town.

There’s talk on the street; it sounds so familiar
Great expectations, everybody’s watching you
People you meet, they all seem to know you
Even your old friends treat you like you’re something new

If we look at the recent signals from the Chinese economy we know that a depreciation of just under 2% is far shy of what might reverse that. So we see a potential game of pass the exporting deflation parcel where Japan has been joined by Euro land and China responds. Now who thinks that the UK and US will respond to that with interest-rate rises?

Meanwhile in a land down under christened on here as the South China Territories there must be real concerns about what is going on and how much they will be sucked into it. From Bloomberg.

The Australian dollar lost 1 percent against the dollar on China’s devaluation,

As to whether this will solve the problem the aptly and presciently named China Crisis have some thoughts.

And if I wish to comfort the fall
It’s just wishful thinking

After all unless there are Martians it is all a zero sum game.