Remember last week when I told you that Charlie Morris spent a furious ten minutes at the Bloomberg terminal showing me how China’s currency was 20% overvalued relative to its Asia-Pacific neighbours? Well, the Chinese began doing something about it on the weekend. It’s called devaluation.
“Late on Friday”, according to CNBC, “the China Foreign Exchange Trade System (CFETS), a sub-institutional organisation of the People’s Bank of China (PBOC), introduced a new exchange rate index that will see the yuan (CNY), or renminbi, valued against a basket of 13 trade-weighted currencies.” The previous system was based on a “managed, floating” exchange rate between the yuan and the US dollar.
You’d normally interpret currency devaluation in light of trade. That is, it’s commonly thought that if you want to boost exports, devaluing your currency is one way to do it. When your goods are cheaper for foreign buyers, you should sell more. It doesn’t always work this way.
But it’s a nice theory
Is China trying to boost economic growth through devaluation? Is this more of the currency wars? Or is this part of the ‘internationalisation’ of the yuan and the effort to make it both freely tradable and freely exchangeable? I’m going to ask my friends over at Strategic Intelligence. They’ve been working with Currency Wars author Jim Rickards on this subject for the last year.
In the meantime, I’ll note that the Capital and Conflict roundtable brought China up as one of the big risks for 2016. Early on the show, Alex Williams talked in-depth about the big restructuring news at Anglo-American and Glencore. Tim Price and Mike Hollings agreed that China was the single-biggest risk to markets in 2016. You can pick up that thread at 51:35 of the show.
It’s all related. Free-falling miners, tumbling commodities, a slower China. The toxic cocktail can lead to debt deflation. Low interest rates fail to engineer more borrowing and growth. The cycle is played out. Debts are written off, or defaulted on. Is that the story for 2016? Or is there another?
Category: Geopolitics