Six thoughts about the Yuan devaluation

1. The Australian and Singaporean dollars are weakening, as are many emerging market currencies.  Take this to be a signal of Chinese weakness.  Overall this is a sign of surrender to the market.

2. Offshore-RMB is down more than the size of the devaluation, a clear sign the market believes the currency will continue to decline in value.  Take this to be a signal of Chinese weakness.

3. “Gold related stocks” are being called “the biggest winner.”  Take this to be a signal of global weakness.  Commodity prices are falling and there is a general flight to safety.

4. A panicky flight of capital still is not the most likely scenario for China.  Still, the chance of that scenario just went up, and the leadership knows this, thus the negative signal about underlying economic conditions.  That exchange rate “currency wars” stimulus really must be needed.

5. There has never been a better time to visit China.  As for Chinese leaving the country to finance Paris and Bangkok, the index of Chinese airline stocks just fell 9.6 percent.

6. U.S. monetary policy just got harder, that is the dollar is up once again.

A summary of the currency move is here, I believe it is the single biggest drop in the modern history of the Chinese currency.

Addendum: Here are thoughts from Christopher Balding.


Obviously China seems to be having a contraction but doesn't (6) explain an awful lot? The USD is absurdly high right now, seems silly to peg to it for China or anybody.

Just to clarify what I meant by USD is absurdly high: the USD value is increasing not only relative to other countries but even in CPI terms relative to baseline (fancy way of saying Fed's implicit inflation target seems to be dropping, seems to be < 1.2% now, since they are tightening with TIPS in that region).

"USD is absurdly high" ???

So I should be really sad and depressed if I managed to save a lot of $$ -- who would want to own a currency that's worth more now than before ??

If I constantly borrow huge $$ amounts (as US Congress does)-- no surprise at all that my "monetary policy" should indeed get "harder".

What 'should be' the value of the US Dollar, if it's now absurd ?
(and how would you determine that?)

How can you say the USD is absurdly high? Then where is the Bull Market on the globe? Commodities are way down and even oil, the Don Corleone of commodities is not bouncing back up anytime soon, 6 - 12 months. The Yuan position compared to other currencies is probably higher than it was 12 months ago.

One aspect of the global market, is how much of the slow pullback of the Obama adminstration from global wars and signing the Iran nuclear deal is creating a run to dollar safety. (Obama is only using air power to contain ISIS, Saudia Arabia is making Yemen war, Russia/Ukraine dance, and the Iran deal is a slow Mid East exit strategy.) So if the US signaling to not interfere with all wars, is Bull Market statement for the dollar and a Bear market to other nations? you think the US is limiting ISIS power or increasing ISIS power?

Why would US monetary policy be harder? Sounds like the danger of inflation has gone down in the US.

I sent this link to Andrew but the scary thing is Marcus may be right here:

Exactly, but for the past 7 years, deflation has been the greater danger. This change makes it more likely that the Fed will fall even further behind their inflation target.

"Danger of deflation" sounds here like a positive supply shift. The US can enjoy more goods and services than before since it has the option to either purchase them domestically or from China at reduced price. That's a good thing. You want to do *more* stimulus and only stop when you run up against constraints (inflation in the case of money supply or interest rate increases in the case of fiscal).

Deflation can be caused by a positive supply shift, but that's not really a danger. The danger is deflation caused by a contraction in monetary policy.


The Fed is already way under it'd supposed PL target. This will make it's absurd policy of increasing interest rates even more costly.

So no Fed interest rate hikes for the foreseeable future?

Frighteningly they don't seem to work that way:

2 percent? Who cares.

2% is small compared to what?{%22showArea%22:false,%22lineType%22:%22line%22,%22allowChartStacking%22:true}

Some bond trader or futures-and-options trader who lives off interest rate spreads or some such.

Lever that up at 30:1 and you'd care too.

A rich and impressive analysis. Thank you.

5. Was there really no better time to visit China? At least Marco Polo and George Macartney got to see something that wasn't a cheap imitation of their own countries.

If you were an opium dealer, the 19th century was a fantastic time to visit China.

"As for Chinese leaving the country to finance Paris and Bangkok, the index of Chinese airline stocks just fell 9.6 percent."

Most Chinese airline flying is domestic, and there should be skepticism anyway about the financial results that Chinese carriers have been reporting anyway.

Great posts, thank you! Tyler and Christopher both. No consideration of exports, though? Especially since the devaluation happened a day after July's dismal numbers. Is the macroecon blogosphere walking on eggshells so as to avoid offending Scott Sumner and his strict interpretation of classical theories?

Biggest drop in modern history: does this not count the devaluation in 1994?



The RMB/USD chart shows that China relentlessly devalued the RMB from 1980 (1.5 RMB per dollar) to 1994 (8.6212 RMB per dollar).

Some countries believe that devaluation works and "exports matter". Others don't.

No extra points for guessing which country is the biggest success story in world history and which one (of late) isn't.

Right now as a I read MR there's a still sleeping doe-eyed creature in the next room over that I have no business sharing quarters with. Ray Lopez, I'm sorry for everything I ever said.

I'm not sure whether the Commodore would provide hearty approval or haughty disdain.

And would this have anything to do with currency devaluation?

Why are you here and not in the next room?

p_a: Currency not a factor in the transaction. I'm starting to believe in God because it was a ridiculous undeserved windfall.
gab: I did my patriotic duty.

An video on the outlook of the global economy my colleagues and I made off the back of the recent St. Petersburg International Economic Forum

Might inspire some lively rants for the next Republican debate. Should be right in D. Trump's wheel house.

The real clue that this is just the start of Yuan devaluation is this- the PBOC described it as a one-off readjustment. This is central bank speak for, "we are just getting started".

And is this morning a case of the PBOC doing something, or is it the case of them stopping what they were doing since March? The Yuan to the Dollar had traded in an extremely tight range since mid March. What forced the PBOC to let go?

Tyler, you seem to be buying into misguided hysteria about a small, market-driven depreciation against the dollar. China's economic crisis is real, but not further fighting the FX market is one of the *best* things China can do.

By tracking the dollar, China has been substantially appreciating against Asian and European currencies. That was clearly a very expensive mistake. FX reserves have been dropping fast, which means yuan liquidity has been getting hoovered up to defend an inflated FX value. That's the lousy policy that's exacerbating the crisis.

Allow some market move was good news, an important signal that China is relaxing its damaging defense of a damagingly overvalued the yuan. But we shouldn't get our hopes up too much: the central bank will probably continue intervening, only somewhat less aggressively.

Regarding the underlying situation it looks like China has been lying about its aggregate data. They claimed a 7% second quarterly annual GDP growth rate. This looks highly unlikely, and this devaluation effectively confirms it. Industrial production reach a two-year low in May. Oil imports have been falling. None of this is consistent with 75 growth.

My Russian sources say Chinese growth is more like 4-5%, and they are cutting deals with China and friendly with China, as well as having experience with data manipulation by governments run by Communist parties.

I told you! The Chinese are already so scared of me. They are reading polls too. They ain't stupid. They know I am leading in all the polls. In fact, a new poll just came in from Wyoming this morning. I am leading bit time. The Chinese are scared shitless of President Trump, that they already devalued their currency now! It's a sign of weakness. I will crush them!

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