Posts Tagged ‘currency’

The Yuan is pegged to the US Dollar within a band.

As the US Dollar gains strenght and Chinese competitiveness declines – it was just a matter of time that China intervened on its currency.

And naturally it has done that with a bang…the over the counter USDCNY plunged the most since Lehman crash!

The devaluation has been approx -1.9% (April 2013).

These has two meaning ….the Chinese are forecasting a FED rate increase in September (and further USD strengthening) and also that Chinese issues are much bigger than the world thinks.

There are also quite a lot of consequences from internal (Chinese deflation and Chinese corporate debt being the largest) and external (how the other regional reserve banks, mainly Bank of Japan and Bank of Korea).

Another extremely complex piece of the puzzle to take into considerations.


What a splash.

All luxury brand (BMW etc ), airlines,  which came to rely on the Chinese consumer got it really badly.

Practically everything imported became more expensive for Chinese and this will hit particularly hard all Asia including Australia.

The major beneficiaries are naturally Chinese exporters, specially in the technology sector

The PBoC doubled the yuan trading bands.

This is a signal that the Chinese government is undeterred of making China more like a normal market.

Until now For EX investing in China was extremely easy. You invested and you knew that the Yuan would be rising against US Dollar. Very easy money for professionals. 

Now this is a signal that the one-way bet will not  so easy any more.

Which means

Hot money (speculators) will likely to leave China

Chinese exporters (and shadow banking)have a welcoming space to breath

So in all, probably not much will change and it is a good thing…a step towards total freedom.

But it also highlights that China will effectively behave more like a Western country – let the market do its work – letting go bankruptcy some companies and saving the one too big to let fail.

Good for the long term, but volatile in the short term.