Is Yuan facing a ruble-like collapse?

Falling-Sandcastle

Cross posted from Investing in Chinese Stocks:

Since the ruble’s collapse, there have been several articles comparing the Russian situation to the Chinese one. Most of the opinion argues the yuan is not going to depreciate like the ruble due to China’s large reserves and more diversified economy, but popular financial bloggers Liu Junluo and Niu Dao disagree (no surprise) and see paths to yuan collapse.

人民币有贬值压力 不会重蹈“卢布式”危机 (Yuan Has Depreciation Pressure, Won’t Follow “Ruble Style” Crisis)

With a stronger dollar, currencies of emerging market countries will go where? “Ruble” type of crisis will be transmitted to the renminbi and the currencies of other emerging market countries?

Yu Xuejun of the PBOC Shenzhen branch:

He told the 21st Century Business Herald interview, said the crisis affected the ruble devaluation will increase pressure on the yuan, but now China and Russia’s economy and is quite different, coupled with China is sitting on nearly 1/3 of the world’s foreign exchange reserves, is perfectly capable of maintaining the RMB exchange rate at a reasonable level. Therefore, the RMB is unlikely to occur, “ruble” type of crisis.

He goes on:

Of course, in addition to the supply side, there are reasons for the demand side. That is, since the 2008 global financial crisis, after adjustment for years, the global economic downturn has not yet out of the quagmire. Meanwhile, the 2014 world economic growth is weak there is an important factor, that is downward pressure on the Chinese economy, the demand for energy, raw materials decreased significantly. A few years ago, although the financial crisis hit the global economy, but oil, iron ore, copper and other bulk commodity prices have remained high, which is an important reason for the huge investment in China provides a huge demand. Now, as China’s economy was continuing downward pressure on demand for bulk commodities significantly reduced, which makes almost all of the world’s bulk commodities are declining. Therefore, the sharp decline in oil prices is not independent and accidental, but there is a macro-trend of problems. In this trend, the United States and Europe to Russia before they can make the best use of sanctions, the flow, and thus to exert enormous pressure on Russia.

This article (好淡因素相当 人民币汇率以稳为主基调) argues the yuan is stable, but don’t forecast otherwise! It could lead to a self-fulfilling prophecy:

From a broader perspective, the market should not be made for the expected depreciation of the RMB, but also to avoid the authorities concerned to make such a policy orientation. At present, the global fluctuations in currency exchange rates increased, the potential risk of the outbreak of the currency crisis in emerging economies in the increase. The recent outbreak of the ruble crisis, the financial system and the economy caused serious injury. Southeast Asian financial crisis in history, starting from the currency crisis and also transmitted to the financial system and the real economy. If the yuan devaluation is expected to form a broad, eventually self-reinforcing, and finally transmitted to the real economy and deeply hurt China’s real economy.

Popular blogger Liu Junluo disagrees with the optimists. 中国央行将加息了和楼市

Dollar index broke the 100 later, China’s central bank about $ 2.3 trillion in the hands of “non-US currencies,” oil and mineral assets will face a loss of up to 70% of losses.

Now, in China in 1994 is similar to the famous Mexican Tesobonos bond size at about $1.5 trillion, which is “dollar interbank bond.” And, most did not do currency hedging. 1994, Tesobonos problem outbreak in Mexico, Mexican currency and overnight sent the Mexican economy, “hell.”

He’s talking about Chinese investments in natural resources and minerals around the globe, as well as short-term debt and dollar denominated loans at SOEs and real estate developers.

Now the problem is that Chinese real estate developers, Chinese state-owned enterprises and the Chinese central bank’s position is a “single position”, “single position” in the financial markets is a suicide pact. For example, if the dollar rises, Chinese developers and state-owned companies will start panic buying dollars, and that will cause a loss to China’s central bank due to reserve diversification. Thus, China’s central bank will raise interest rates sharply to attract dollars, however, a substantial hike will lead to China and the Chinese state-owned real estate to further losses, so that China and the Chinese state-owned real estate would be more mad rush to buy dollars, while China’s central bank diversification of official reserves will be further loss, therefore, China’s central bank will raise interest rates further. In 1997, the ASEAN region was annihilated by this real estate and central bank suicide pact.

Liu goes on to argue that the stock market bubble isn’t there to prop up the economy or repay debt, but to keep hot money from pouring out of the country and triggering a currency devaluation. It will also trap Chinese citizens when the central bank closes the dollar window (although Chinese stocks will be better than cash in the long-run if the yuan devalues sharply).

So, we see the Chinese central bank quickly creating super hot Chinese stock market in the past few months, has attracted hundreds of trillions of money into the stock market. Soon, we will see all these hundreds of trillions of money is buried in “the stock market dead pit” scene. Will China’s stock market is now crazy aunt who rushed to the time to become China’s aunt who ruin, and that also what the Chinese central bank stepped into the doorway to exchange American dollars?

After the Spring Festival, China’s central bank will allow the rapid devaluation of the RMB exchange rate. And in this year, May 4 to domestic residents dollar closed the window. At the same time, tightening the money supply began to promote the domestic real estate fell to lock estate liquidity.

This year in March, the launch of the “real estate registration” to “anti-corruption”, or for overseas Chinese central bank’s huge losses to lock in domestic liquidity. Let’s central bank has not yet entered the door, ready to exchange dollars people first “dead” mean?

This isn’t new ground for Liu, who argued in 2013: Gold going to $500; Chinese yuan will collapse; China will nationalize dollar deposits

Another Chinese financial blogger “Bull Knife” (Niu Dao) argues that the collapse of oil shows the Chinese economy is collapsing: 原油崩盘昭示中国经济全面崩溃. He argues that the global rebalancing will take place via exchange rates. Chinese real estate is not “its own thing,” rather in the age of globalization, it too is subject to global conditions. He says the A-share bubble is fueled by commercial bank loans funneled into stocks because Chinese shares have no investment value, only speculative value. Make some money and run. He criticizes the Chinese government printing money to pull up land prices and even copper. (From November 2014: Chinese State Agency Buys Up Copper, Keeping Floor on Prices. China needs to prop up copper for the same reason that it needs to prop up land and real estate prices: a mountain of speculative debt will collapse if the underlying collateral craters. And copper is at a critical juncture….) Ultimately, he compares China’s fixed exchange rate system to the fixed currency regimes in Latin America during the early 1980s. They began collapsing when the U.S. Dollar Index climbed between 100 and 126. By 1984, the USD Index was at a new high of 165. Niu Dao sees the USD Index hitting 171 this time.

I don’t agree with Liu and Niu’s arguments because they don’t give much support to them. While I can make a case for their conclusions, they don’t connect many dots in their posts. These bloggers have a flair for rhetoric, but do not give a good foundation for their forecasts. Their predictions are also extreme and Liu has at least poor timing (see some of Liu’s other projections here, including a 40% drop in the yuan in 2013). They are entertaining though, and show that China allows a wide range of debate in areas such as economics.

For all their flaws, their conclusions may still be pointing in the right direction. The yuan is at a greater risk of breakdown than is recognized by the market, and the path to serious devaluation (or the threat of it) would likely involve the Chinese central bank ending dollar convertibility. Liu earlier had a post noting how the U.S. dollar collapsed as China gobbled up treasuries in the aughts (2000s) and goes to argues it will surge as China diversifies away from the dollar in the 2010s. Foreign exchange and billions upon billions of dollars invested in natural resource projects, plus the Chinese real estate bubble, are all at risk from deflation, the flip side of a dollar rally. Michael Pettis has noted how China today is very similar to the USA in 1929 and Japan in 1989; both nations had huge foreign reserves and were creditor nations. Most yuan bulls cannot conceive of a path to yuan devaluation because of the large reserves and seemingly invulnerable Chinese economy, but the yuan is literally a paper tiger, as are all fiat currencies. Even many yuan bears base a yuan devaluation on internal economic conditions, not an external dollar rally. Chinese bloggers, however, see a US dollar rally as the genius Federal Reserve and Wall Street about to skin their biggest prize yet.

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Comments

  1. migtronixMEMBER

    Chinese shares have no investment value, only speculative value

    LOL its different here?

  2. flyingfoxMEMBER

    Chinese bloggers, however, see a US dollar rally as the genius Federal Reserve and Wall Street about to skin their biggest prize yet.

    Interesting point …

  3. How about that, gold to $500 and copper going below the $2.00 support. Both of which I agree with. That is it for Australian mining, care and maintenance for the next 15 years, till this washes through. (probably excluding uranium) WW

    • Now, who would a gold to $500 call suit.

      Bearing in mind there is a lot of gold fleeing West to East.

  4. That linked Michael Pettis interview is very good.

    http://tablet.fuw.ch/article/china-has-two-more-years-left-to-adjust/

    What happens in China depends on the willingness of the current ‘winners’ to accept more winnings going to the current ‘losers’.

    Historically most countries find this is a stumbling block as the winners prefer to wreck the joint than allow lazy leaner ‘losers’ a leg up.

    Hope China are not hoping that Australia will provide them with a roadmap.

    Mr Abbott’s team seem very keen to maximise opportunities for ‘winners’ to keep on winning rather than create conditions for more winning by all.

  5. GunnamattaMEMBER

    The RUB decline has almost exactly matched the crude slump. Brent was trading at more than 100/bbl in August and is gasping for breath at 50/bbl now.

    Energy related exports comprise about 80% of Russia’s exports, and more than half of their budget revenues too.

    The RUB was running at USD/34 in July and is now running at 63 (having ranged between 78 and 52 since dec 17).

    That in part reflects a determnination by the Central bank of Russia to NOT intervene (indeed they floated their currency in Nov) heavily. Sure there is the eastern Ukraine issue and financial sanctions etc, but the prime drive of the RUB dive is crude.

    The Chinese have all sorts of issues in property and shadow banking system, but I would have thought the likelihood of something remotely akin to RUB collapse would be fairly slim.

  6. Macro Enthusiast

    Countries that have significant amounts of foreign currency-denominated debt tend to experience Russian-like currency crises, because they can’t print the currency needed to pay off their debts.

    One important difference between Russia and China is the amount of USD-denominated foreign debt. From what I understand, Russia has quite a bit more than China officially.

    Unofficially though, there are reports that China has accumulated significant USD debt in the private sector.

    Also, even though China does not officially have significant USD-denominated debt, it runs a currency peg. So capital outflow from an unwind of the carry trade hurts the economy, because it causes monetary authorities to shrink money supply (in order to maintain the peg). Exacerbating this effect is the arguable overvaluation in the RMB/USD on a properly-measured PPP basis.

    In short, China does not have to have a Russian-like currency crisis – the RMB is expensive – just like the AUD. There is room for depreciation – but as long as the foreign currency-denominated debt issue is not too large, the RMB does not have to crash.

    An interesting question is whether the domestic credit crisis in China would be enough to cause the RMB to drop sharply – much like whether a housing crash in Australia would drop the AUD. From a currency demand perspective – possibly yes. But from a currency supply perspective, possibly not. De-leveraging destroys money, and makes currency relative scarce.

    • migtronixMEMBER

      Well if they’re Japan they do it on purpose 0.o

      No foreign debt needed for a 30% collapse

    • GunnamattaMEMBER

      Russia has very low levels of state debt – circa 10-14% of GDP [depending on what source you get the data from]

      It does have a bigger private side issue with corporate debt (many of which are state backed/part owned/guaranteed) but even then its banking system has very large assets outside Russia (unlike China from memory) with which to backstop calls. There is a BNE piece I have linked to a few times which goes into it.

    • Your posts are rambling gist’s of vague understandings all wrapped up in an obfuscated ball of assumptions backed by pseudo guess work.

    • Macro,

      The foreign currency denominated debt issue in Russia has been exaggerated. The issue in Russia isn’t the foreign currency debt. Look at external foreign currency debt/ FX reserves, or foreign currency debt/ exports. Russia looks nothing like Argentina.

      The problem in Russia is that:

      1. Oil & natural gas made up 68% of total exports and 50% of all budget revenue
      2. Their ToT has collapsed (negative demand shock). And financial sanctions (re. Ukraine) have been imposed (negative supply shock). Both at the same time and suddenly.
      1. Coming into the crisis the policy rate and inflation were both at about 9% – In other words money demand was well and truly satiated. Meaning there is no room for monetary financing of anything – not the foreign debt, not the sovereign debt.

      If the government tried to print money to offset lost oil and gas revenue, the rouble would just collapse even further. Again not because because of foreign currency debt, but because money demand was well and truly satiated before the crisis, and even more so now. It would lead to hyperinflation.
      Russia today is a classic example of why even a country with a fiat floating currency can’t print their way out of trouble.

  7. Frankly I have no idea where the Yuan is headed. IMHO China stands again at the cross roads either it becomes a globally significant fully tradeable “reserve” currency OR China itself settles for the subservient role of being forever the US’s manufacturing hub and junior partner in globalization. We all know this game very well it involves forever chasing USD and recycling them ultra fast so that Chinese manufacturing itself remains competitive (this game is what supported the whole pre GFC US property debacle).

    Frankly this is 2005-2007 revisited, at the time I opinioned that China couldn’t simultaneously be both master and slave it had to choose….well the GFC interfered with the process but the same decision still needs to be made.

    Based on my own experience the PBoC is at best a reluctant Reserve currency master, frankly they’re still stumbling around desperately trying to find exceptions to the Triffin Dilemma….which is probably the best possible indicator that they’re really not up to the job of transforming the Yuan into an alternate reserve. Of course its not just the PBoC that must change the whole Chinese economy and the Chinese People must transform themselves into the new Asian Uber consumers, many would say this change is simply not in the Chinese character.

    • GunnamattaMEMBER

      I think it is even more than that. There is an inherent contradiction in being both the low cost producer of manufactured goods, and trying to stimulate domestic demand through getting the punters more money to spend – Pettis has written about that enough. My guess (not being particularly a China man) would be the PBoC doesnt want to wade into sorting that out.

      They could go the Japanese route and adopt an openly mercantilist monetary policy/currency approach, but I am not sure the geopolitics of that would sit comfortably with what appears to be their aspirations.

      • Is the choice really theirs?

        With wage inflation running at around 10%, it seems like their days of being the world’s low cost manufacturer are in their autumn years at best.

      • Fair enough, although it’s about a yuan collapse that may or may not occur later.

        I guess I’m arguing that the choice about China being forever the US’s manufacturing hub is no longer available to be made, at least in part because of their rapidly shrinking workforce.

      • @Stat

        The Chinese are the ones opening up manufacturing in cheaper emerging labour markets like Myanmar.

      • migtronixMEMBER

        @Lev not to mention the great new high-speed rail silk road to Germany and Spain. I wouldn’t bet off China in the least.

      • Yea I agree but I dont think the world can support a Japan2 (China) In business circles it is well understood the certain business plans scale and others, well they just cant be scaled, they reach some maximum size and that’s it. I’d suggest that Japan itself fully services the Japan model leaving no room for any copies especially not a copy that’s 10 times bigger than the original.

        If China successfully transitions to a reserve currency it’ll be some sort of minimalist “managed” reserve which might be exactly what the world needs. I wouldn’t be at all surprised if this reserve currency became a simple goods exchange currency which interestingly is not unlike the original plans for Bancor. This would indirectly dampen the Global hot-money machine which also interestingly is an IMF goal in search of a solution.

      • @Lev,

        Exactly – the manufacturing is moving out of China to cheaper places, including the US and Mexico, but also Africa and cheaper Asian nations. They’re moving up the value chain.

        The decision has already been made, or circumstances have moved on.

      • @China

        The world can and does support a second Japan in China – China is already bigger.

        The emergence of Japan in the 1980’s along with their jap-crap also saw the destruction of the US rust belt. Its all about transitioning economies. Japan is already moving away from its previous model into robotics and probably space – as is the US.

        China is the equilibrium point for permanent global manufacturing – it will not happen again due to infrastructure requirements, stability etc – it will not transition again, it will not become fragmented across regions, it is fundamentally settled.

        China’s currency position is not one of a isolated reserve competing with the US – it is part of a basket of currencies representing emerging markets.

        As much as we hold onto our wistful paradigms the stone cold truth admitted to regularly even by the US is that the next 100 years is the Asian century. No one denies this.

        Europe is now isolated from the world stage rather than being central to it. While Russia and China are at the very epicentre.

        The piffling fluctuations in currency are irrelevant to the monumental shifts which have occurred in the past decade. Going forward China (and by default Russia), India, Taiwan, Japan, Sth Korea, Singapore are all set to take on the world. They now have the infrastructure, the intellectual capital, the military, the resources – everything.

        Good luck with the EU model which is basically 500 years of unchallenged hegemony followed by 30 years of growth based on neo-colonialism and exploitation.

        The only driver going forward is going to be GENUINE productive potential with the military, colonial exploitation model defunct.

        US and Europe are /have throwing absolutely everything they can at this problem including the energy wars and it has totally failed.

        It’s all over bar the shouting.

      • @Lev
        I dont disagree with your Asian century hypothesis, IMHO its a done deal. but that does not in and of itself lead to a replacement of USD as reserve currency especially if the USD remains the common currency of goods exchange (and pricing) within the Asian region.

        For me the real test for the world is how it allocates scarce resources (and productive capacity) the worst possible solution would be a world in which non-renewable resources are consumed at 10 times their current consumption rate. basically the emerging Asia becomes a western style uber consumer. (aka Japan2). So if that’s not the final solution than logically the Asian century must result in European and US levels of resource consumption falling below Asian consumption. We’ve seen this already wrt IO and Automobile use (probably also wrt LCDTV’s) however If China’s per capita consumption is to match that of the US’s then to quote the old BTO song “you aint seen nothin yet!”

      • @Gunna
        It’s interesting because there is a Chinese “over consumption” model but it just does not really appear in the GDP style statistics, its all an under-the-table cash industry.

        For instance when I lived I Shanghai I had 2 maids and 2 drivers as full time household staff…excessive maybe but frankly not that unusual especially within the expat community. If anything the Chinese top 1%ers are even more prolific consumers of service labor I could name plenty of 3 person households with 6 full time live-in household staff, I dont think any of this shows up in official employment statistics its all a cash industry. There are also plenty of Chinese businessmen with two and even three (very pretty and very young) full time “personal assistants” .

        I suspect Chinese consumption will continue to grow strongly but it’ll be this uniquely Chinese style of consumption, and it’ll grow much to the confusion of western analysts.

    • migtronixMEMBER

      I don’t know I think they’re putting a floor on gold, who knows how much they hold?

      • The other thing about knocking off the USD as a reserve currency is you would have to have a good idea of who is holding USD notes. It is probably a fair bet that the Reserve Bank does not know the location of probably half the currency it has printed. You could easily turn “friends” into enemies WW

    • The world desires goods produced in China and the world needs Yuan to buy those goods.
      IMHO the Yuan will adjust but it can’t collapse.

      • migtronixMEMBER

        I don’t think it collapses it either, the USD would need to react, otherwise bye bye resurgent manufacturing sector in the States. Heck China might even do it on purpose.

      • Anything that isn’t the USD is going down. Safety, safety, safety.

        A falling yuan might mean even more chinese scrambling to buy Australian property as security.

      • Depends on how far it falls – if it falls by a lot, maybe people whose wealth is currently in yuan will find themselves priced out by those who came before when the yuan was comparatively strong.

        A lot of them might have their wealth i USD, I guess, but in that case, a falling yuan doesn’t give them an extra incentive to buy Australian property.

  8. Meh.

    All this talk about Russia, China, Australia, Europe (Greece) forgets one seriously important issue. US.

    The ENTIRE global financial fiasco was caused by a US financial meltdown, how have people so readily forgotten this ? The US is not some uber powerhouse of financial stability and control. It is a teetering Jenga game which collapsed.

    The US has $18.7 Trillion in debt. This represents over %100 of GDP. The only other time this has occurred was at the PEAK of World War 2 – in order for the US to recover the had the holy trinity of Europe in tatters, effectively making them the worlds sole manufacturer, an oil boom, huge debt repayments and became the reserve currency of planet earth.

    Absolutely EVERYTHING is pointing in the opposite direction right now.

    Imagine if we were comparing the US with any other nation with debts of $18.7 TRILLION – it wouldn’t even be a question.

    The point is, we are no longer dealing with a state with a reputable currency and fair value by ratings agencies. It is total and complete manipulation of the entire system with all rules thrown straight out the window.

    The oil price plunge is going to affect US banking more than anyone realises – its not China or Russia that are in trouble. When TRILLIONS of debt starts to emerge in US banks via investment right across the western and developing world we will see the reality of this 3 cup game.

    • migtronixMEMBER

      Sure Lev but every other CBanker at Basel wants to do the EXACT SAME THING. Print their way to riches and ward off the the dropping head-cutter.

    • Just to add to this.

      The last time the US went into total melt down taking planet earth with it was due to a total and utter failure of transparency, regulation, oversight and ability for the market to SEE and UNDERSTAND what was happening and the risks involved.

      In otherwords the regulatory capture, secrecy and institutionalised corruption of the United States places it as an accepted form of the Chinese “dodgey” shadow banking sector.

      None of this has changed, in fact it has become worse despite E. Warrens attempts to light a candle.

      We do not know, and will not know what the reality is inside the US financial and banking system until there is a late night meeting about an impending nightmare scenario and some insane response is required and approved and is then announced as fait accompli.

      The lack of transparency and regulatory oversight in the US represents an ongoing and catastrophic risk which will continue to implode the global system until it is addressed – this is the fundamental, core problem with capitalism – it will always tend to consume itself as Ouroboros strives to create Möbius strips of economic freedom.

    • This http://www.oftwominds.com/blogjan15/oil-war1-15.html points out that the Fed could bury the bad oil related bonds.

      ” 3. Financial strategies that support one’s domestic producers regardless of current global prices. Those producing nations that can print their own credit and currency–for example, the U.S. Federal Reserve–can quietly underwrite domestic production by buying shale-oil related junk bonds via proxies, effectively burying the debt.

      Defaults? What defaults? The bonds are either refinanced via proxies or enter suspended animation in forbearance, i.e. the interest is not being paid but the owner of the debt (the Fed) doesn’t care. ”

      Dodgy as anything, but they keep getting away with that sort of thing so who’s to say they won’t again.

      • Ok altogether now – can you say AIG,Fannie Mae & Freddie Mac.

        I was very clear about the idea of a shadow banking system in the US posing systemic risk – you are simply claiming that despite the recent empirical evidence of that danger its all good, lets do it again.

        False.

      • I’m not claiming it is a good idea but that they may try it again thinking that because they have been getting away with it so far they can keep doing it. Everyone seems to be cutting them a lot of slack.

        I’m amazed at how many times they get away with it.

      • I’m thinking they get away with it because the rest of the world has been prepared to hoard USD paper, notes and Treasauries, in shoe boxes and vaults all ove the world.
        Remember all the paper dollars that were found in Iraq.

        From a simpletons viewpoint crunch time will come when somebody holding a significant heap of paper thinks ‘blow this’ I’m going to buy me some real US strategic assets with this paper crap. Then the US Govt says’ you can’t do that’ and everybody realises they are holding just bits of paper that aren’t even useful as toilet paper.

        This realisation may also be achieved through some of Lev’s mysteriouys derivatives etc if some idiot somewhere decides he wants to see the real thing backing the derivative.

        “I’m amazed at how many times they get away with it.”

        Yep

    • @Leviathan
      “The US is not some uber powerhouse of financial stability and control. It is a teetering Jenga game which collapsed”

      Absolutely spot on summary. The USA is an out of control, blinded & nasty giant stumbling around trying to pick a fight /destroy anything to allow it’s industrial / military complex to survive a little longer. Bastards.

  9. Forecasting is a mugs game, so here goes, it def will not collapse, and even if it does, they could just float it without any controls at all, and it will shoot back up to all time highs. They actually still make stuff in China, and it is of increasingly higher quality.

  10. No I don’t think so. China is so much more than Russia and comparisons are misguided. However, strategic devaluation by authorities definitely possible.

  11. Long USD vs CNH is my favorite tail trade for 2015.

    The main reason being – it is priced as if a devaluation of the RMB is never going to happen.

    Spot is 6.22 (onshore is 6.13)

    6.30 USD/CNH calls for May are trading at 0.05

    3.4% vol – its a buyers market – similar structure on the AUDUSD pair trades at 11% vol

    I don’t see a Russian style outcome (but I won’t be working for a while if it did happen) – but the key driver is that the amount of USD carry trades that have been used in China by the private sector are in the trillions – like nothing seen before.

    Everybody has seen it as a one way street and at the moment the train is going in the wrong direction. Investments are going bad and the funding is all of a sudden blowing out.

    Previously they have been able to run a carry trade and have a forwards market implying appreciation of the RMB. Now we are seeing defaults for the first time too.

    Extreme credit expansion. Extreme inflows. Super low vol. Interesting set up if/when it reverses.

    The Chinese government on the other hand have no real reason I can see for not breaking the current peg and putting a 10%+ or so devaluation into place.

    Why not? They are mercantalists at heart and would not be happy with the JPY collapse and the effect on trade.

    Do the Chinese really want to spend their accumulated reserves to manage an artificial peg?

    USD/CNH at 7.00 turns those 0.05 oppies into 0.70c

    Otherwise – just kiss more money away to the premium fairy – but don’t forget to reload!

    • Good post 88888. I agree long USDCNH is the best risk/reward trade I can see out there at the moment. Will be very painful for all those carry-traders if it gathers steam.

    • Good post 88888. I agree long USDCNH is the best risk/reward trade I can see out there at the moment. Will be very painful for all those carry-traders if it gathers steam.

    • 8888 despite all the carry trade they have still run a consistent and high CAS. So where do all those USD go? Is it sterilised in Treasuries? Or is it used to finance the offshore adventures.
      Trying to predict a devaluation of the Yuan would seem to me to be very dependent on the answers to this sort of question.
      (Note not arguing. Just trying to sort something in my own mind)

      • There seems to be a lot of confusion here about the monetary supply requirements for a currency to actually become a reserve currency. One of the critical problems is a willingness of the reserve to create sufficient global liquidity to enable the effective adoption of the their currency as reserve and to do this without adding unnecessary volatility (adding to exchange rate volatility) maybe DeepT will step in because I’m way out of my depth.
        Scholars within the PBoC have penned many articles pondering this exact dilemma however most of these articles are hardly ever translated and therefore have limited release outside of China. We saw a couple of years back how the Aussie shot up when the RBA refused to print despite other central banks taking large positions in the humble Aussie. This just highlights the “illogical” feedback mechanisms that drive currency valuations when the currency has demand outside the local economy.