Global equity futures are up strongly on the weekend announcement by the People’s Bank of China regarding the depeg of the Yuan to the dollar (US Futures below).

To be blunt, the Chinese announcement is only that — an announcement which may or may not be followed through. As such, we should treat it as a precursor, and not the significant shift the market seems to be making of the announcement.

I am neither a currency nor a China expert; however, a few items have emerged:

• Protectionist legislation is being discussed in the US due to the über cheap Chinese exports; this announcement may preempt Congress from passing it.

• In theory, a rising Yuan can help reduce Sino-inflation, which has been running way above global trend;

• China might be concerned that global economies, especially in Europe and America, remain soft, and this could be of aid to the exporters in those countries.

Whenever the PBOC makes a grand announcement, I am reminded of the Ralph Waldo Emerson comment:  “What you do speaks so loudly that I cannot hear what you say.”

Rather than make grand changes to your asset allocation mix, we would suggest waiting until their is evidence of action, rather than react to mere announcements . . .

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Category: Currency, Economy

Please use the comments to demonstrate your own ignorance, unfamiliarity with empirical data and lack of respect for scientific knowledge. Be sure to create straw men and argue against things I have neither said nor implied. If you could repeat previously discredited memes or steer the conversation into irrelevant, off topic discussions, it would be appreciated. Lastly, kindly forgo all civility in your discourse . . . you are, after all, anonymous.

16 Responses to “China Yuan Depeg: Much Ado About Nothing”

  1. insaneclownposse says:

    Dude. I’m no currency expert either, but in a fiat money system where perception is literally everything, you shouldn’t discount this news. This is huge.
    The dollar should get rocked by this announcement and treasuries will take a beating over the next few days as well. If China isn’t going to spend 10% of its GDP buying our debt anymore, some serious waves will be generated.

  2. baychev says:

    Without siding with either China’s or Congress’ position, I’d like to ask: Is it that China’s exports are way too cheap, or western products are way too expensive having built unsustainably high costs of social benefits?

  3. JustinTheSkeptic says:

    Agree, it isn’t like they are going to let it float free. Up a mere .34% whoopie!

  4. cognos says:

    Uh, nice revisionist thinking here…

    Chinese fx increases are the EXACT same as Chinese GDP increases… right? Silly economists dont pay enough attention to nominal. So IF we see 2-4% annual Chinese currency value increase AND they still run 8-12% GDP growth… one gets ADDED to the other for global growth, purchasing power, etc.

    Similarly, it takes the money out of “foregin exchange reserves” at the govt level (silly $2T in bills at 0%) and gives it to the people in terms of purchasing power. Again, global consumption.

    Either way… the markets didnt “pop” solely bc of China. They did because earnings at companies remains good… Europe is accelerating… credit losses are accelerating their decline at US banks.

    You HAVE the buy the dip. The only question is WHERE. Its silly to “rec all cash” at 1150 or 1175 like Barry… and then NOT buy 50% at 1100 and 100% at 1050. Cuz then, poof… its gone!

  5. rktbrkr says:

    All show no go? Time will tell. China still isn’t a free market or democracy and I’m sure the central government won’t allow currency to put a major crimp in their designed-for-export economy.

  6. rktbrkr says:

    Torbo Timmy jawboned them into submission LOL

  7. Mike in Nola says:

    China will continue to subsidize exports no matter what the currency rates are. It takes a little more effort, but they will do it, since that’s all they know how to do.

    Markets pop as computers and the credulous embrace any news as bullish in their herd mentailty haze. Reality will eventually set in again.

  8. dead hobo says:

    In real terms, nothing much will change in China.

    If they allow their currency to rise, then Chinese exports become more expensive to other countries and imports into China become less expensive to Chinese. In textbook terms, Chinese export prices rise, causing local employment to fall since demand for higher priced Chinese exports fall. I don’t think China wants that. Chinese exports create Chinese jobs. Imports into China cost jobs if the goods being imported were formerly made in China.

    Chine has massively stimulated its economy with cheap money and junk lending. Empty office cities are said to proliferate as do roads to nowhere. More Chinese stimulation is needed to fill these empty offices. The currency move would do just the opposite if allowed to become real and not just an announcement.

    Chinese exports rise in price but probably not enough to make goods made in the USA to seem cheaper or to stimulate the creation of new jobs or to repatriate industries that have left the USA for cheap Chinese local markets. Imagine this headline “China Depression Looms as Due to Currency Appreciation.” Not likely. China needs to put people to work from the countryside, not export jobs.

    Finally, the US debt China owns just fell in value. When it matures, they will exchange the dollars for less local currency now that the local currency costs more relative to the dollar. Given the amount of US debt owned by China, this would be a bonehead move.

    In summary, big news and little reality. The news will move markets but have no substantial economic effect outside of HFT dominated markets. Day traders will make out well for a while, but investors should treat it as a toxic announcement. At this time, there’s not enough news of substance to create permanent jobs or create a demand for credit that a demand for goods can be satisfied.

    Rising Chinese currency is more consistent with Chinese efforts to dampen an overstimulated Chinese economy. It is similar to raising interest rates in China. A rational explanation is they are making another attempt to slow down inflationary growth in China. Normally, this would be considered an overall negative, but in an HFT dominated world, all news is good new.

  9. dead hobo says:

    To put it simply, China wants to slow down inflationary growth within China, but not at the expense of lost markets for Chinese exports. Currency moves will be slight and calculated to be of little substance, although, thanks to those who take pride in having ignorance of economics, will look mysterious and potentially significant. Markets will move a lot because markets move a lot on any news, thanks to HFT and ignorant reporters. Economically, it’s a non event if you look at it in textbook terms, which used to model reality.

    Cynic all, it’s probably another chapter in the continuing saga of “Manipulating Long Term Rates On UST Debt.” This is the buildup stage where the 10 year is allowed to rise again. Markets will rise in concert with rising 10 year rates. Then, out of the blue, another debt and/or currency crisis will appear out of nowhere and lower long term rates while pummeling the markets once again.

  10. dougc says:

    Optimist will hail the announcement as the start of our trade bakance improving, American jobs will be created and the budget deficit will lmprove. Why would China want to change the trade situation that has been so slanted to their advantage? When I was a young man I was involved in a street ftght. I was getting my ass kicked and I told the guy that I had enouigh, He replied that he was handing out the medicine and he would decide when I had enough. I will let you decide which role China and the US are playing in my example.

  11. b_thunder says:

    Yes, China will soon revalue. But not up, as stupid Timmy Geithner thinks, but net DOWN! Yuan, which will be tied to a “basket” of currencies will maintain more or less same level vs USD, and be sharply lower vs Euro.

  12. Mike in Nola says:

    Mish has some interesting ideas, mainly that this was simply an empty announcement to head off China-bashing and the G20 and slow down Schumer’s protectionist legislation. One has to admit that the inscrutable Chinese actions fit all of these scenarios. And may have been intended to.

  13. dead hobo says:

    Mike in Nola Says:
    June 21st, 2010 at 8:40 am

    Mish has some interesting ideas, mainly that this was simply an empty announcement to head off China-bashing and the G20 and slow down Schumer’s protectionist legislation. One has to admit that the inscrutable Chinese actions fit all of these scenarios. And may have been intended to.

    reply:
    ————
    It could be that simple and I’m just over thinking the issue. Changing rates internally is local news. Changing exchange rates is international news, even if the rate change is insignificant. That said, it’s still fun to exercise my economics muscles now and then, even though textbook theory no longer models anything of significance.

    Re the 10 year manipulation: Lets see over time if this is potentially true. Circumstantial evidence over time will be a yo-yo effect on long term rates so that they never rise above 4% and always fall significantly if they get close. The reason for the rate falls, and likely companion stock market decline, will always be different and always due to a shock out of the blue. Just as everyone has forgotten the Euro crisis as of today, we shall see if the crises disappear as quickly as they appear.

  14. [...] is particularly vague as to this point and leaves a lot of room for speculation.  I agree with Barry Ritholtz’ statement that “the Chinese announcement is only that — an announcement which may or may not be followed [...]

  15. ilsm says:

    baychev,

    The Germans are net creditors with good social programs.

    US products are way too expensive from unsustainable drags on its economy from militarism, monetarism and corporate welfare.

    USG spending on those represents 13 or 14% of GDP for corporate welfare, borrowed money that did nothing for national productivity.

    In the case of militarism the borrowed money went to harm US productivity.

    And all there is are more years of war with no object, other than to pillage the US.

    They have eaten chopped liver from the goose that laid the golden egg.

  16. [...] point, just an announcement “which may or may not be followed through,” Barry Ritholtz writes at The Big Picture. “As such, we should treat it as a precursor, and not the significant [...]