PBOC aims to shake out speculators with yuan decline


Preparing for a wider trading range for the currency, the PBOC engineered the yuan's recent decline in order to shake out speculators, reports the WSJ, citing sources close to the bank. Among the moves made by the central bank are directing state-owned lenders to buy dollars.

Previous to the recent quick decline, the yuan had been on a steady rise - attracting a flood of money into the country trying to benefit from a one-way bet. The PBOC and the country's banks had to mop up $45B of foreign exchange in December, the 5th consecutive month of net purchases. One-way no longer, the yuan has slipped to its lowest level since last summer.

Analysts expect the PBOC to expand the allowed trading range of the yuan to 2% daily, up from 1% now (it was 0.5% in April 2012).

The move to widen the trading band and perhaps weaken the currency comes, of course, as China's economy is slowing down. "I'm more concerned about foreign demand and my customers' ability to pay me these days," says a businessman in Shenzhen.

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Comments (2)
  • compuirv
    , contributor
    Comments (812) | Send Message
     
    Governments have tried to manage dirty currency floats forever. Sure - some speculators will be punished but in the end the market will win. And other exporting countries will see this ruse for what it is anyway. I doubt even the U.S. Government will eat this baloney.
    26 Feb 2014, 02:41 PM Reply Like
  • Mike Holt
    , contributor
    Comments (1790) | Send Message
     
    The only thing that is truly known is that the Fx value of the yuan declined. Why this is so remains uncertain. It may be that the PBOC is trying to prevent hot money from flowing into China to take advantage of the 10% to 20% yields on money market accounts aka "wealth management products." But, given that Japan has so far won the currency war that the Federal Reserve initiated (see Bernanke's Oct 2012 IMF speech in Tokyo), the resulting increase in Japanese exports may be crimping Chinese exports at a time when they need all the funds they can get in order to cover all the high interest rate debt they have incurred to finance the Fixed Asset Investment spending that they ramped to sustain their GDP growth after the 2008 GFC. Although this debt is still growing due to the compounding of interest, the spending seems to have slowed, as evidenced by falling commodity prices and slowing economic growth in commodity exporting countries. This slowing economic growth creates additional demand for credit right as the PBOC is tightening credit in order to regain control over China's banking system. So, even though their longer-term objective is to rebalance their economy away from excessive reliance on exports and debt-fueled investment spending, in order to do so without triggering a credit crisis in the process they must still sustain exports to generate the funds needed to service their debt. And, since they also rely on exports to emerging market countries, they must still sustain their Fixed Asset Investment spending to prevent those economies from imploding due to further declines in commodity exports.

     

    Apparently, Japan's massive QE program that has served to devalue the Yen and disrupt China's growth model, with implications for other emerging markets as well, was not anticipated. In fact, some even speculate that the decline in the value of the Renminbi is partially the result of insiders getting their capital out of the country. But, given the opacity of China's economic data, this is unclear as well despite the fact that this information now has importance to the rest of the world, including foreign central bankers, since global GDP, trade, and financial markets can be significantly affected by China's imbalanced economic growth model.

     

    Unless the markets tell us sooner, we may need to wait for the National People's Congress to convene their annual 7-day meeting scheduled to begin on March 3 for the added clarity that is needed.
    28 Feb 2014, 07:55 AM Reply Like
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