What happens next? Clearly more devaluation, or else China would not have pursued this step, especially since the paltry 4% deval in one week will hardly move the needle on Chinese exports, which is the real reason why China did this move (weeks after it boosted its official gold holdings by 57%). Goldman also admits as much: “It is hard to have a high degree of conviction in anticipating the increasingly fitful reactions of the Chinese policymakers, and by extension the near-term direction of the CNY. But on a longer horizon, the risks are tilted towards further CNY weakness.”Emerging market currencies and equity markets have been under pressure since 2011. China’s M2 growth outstripped reserves over this period because China did not allow the yuan to depreciate along with emerging market currencies, and reserve growth slowed and then turned negative. The policy mix equilibrium in effect in recent years cannot be sustained any longer. Disequilibrium has begun as the market searches for a new equilibrium.
Yes, folks, if China chases the yuan down with emerging markets then it will only be making things worse. The Australian of has a nice piece on why, from Ruchir Sharma is head of emerging markets and global macro at Morgan Stanley Investment Management:
The full text of this article is available to MacroBusiness subscribers
David Llewellyn-Smith is Chief Strategist at the MB Fund and MB Super. David is the founding publisher and editor of MacroBusiness and was the founding publisher and global economy editor of The Diplomat, the Asia Pacific’s leading geo-politics and economics portal.
He is also a former gold trader and economic commentator at The Sydney Morning Herald, The Age, the ABC and Business Spectator. He is the co-author of The Great Crash of 2008 with Ross Garnaut and was the editor of the second Garnaut Climate Change Review.
