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Some Chinese state-owned banks have cut interest rates on foreign-exchange deposits as part of an attempt to combat the weakening yuan. The move comes after exporters loaded up on their dollar holdings. The rate cut should theoretically make forex deposits less attractive and discourage firms from aggressively selling the yuan.
"Fears of an unstoppable Chinese juggernaut are misplaced or outdated," writes Patrick Chovanec, urging to instead focus on a country stumbling badly and not knowing what to do next. How might the next President respond to a devaluation of the yuan, continued dumping of excess steel and other products, or even an escalation of military tension in the South China Sea (as Beijing tries to shift attention away from domestic issues).
China could find itself in a bit of a bind if the yuan continues to weaken, as the trend could prevent the PBOC from lowering interest rates to boost the slowing economy, Moody's says. Any rate cut could prompt further capital outflows - which hit a net $71.4B in Q2 - and so hurt efforts to speed growth up. The central bank has recently been propping up the yuan in the market by selling forex reserves.
The clearest sign yet Beijing is ready to let the yuan go, a front-page article in the influential China Securities Journal says the country needs a weaker currency to deal with the global slowdown. "The opinion that the renminbi has entered a period of depreciation has now gradually been accepted." How long ago was it that the yuan was a one-way bet higher?
The PBOC continues to let the yuan slide, the currency hitting its weakest level YTD against the greenback today. The drop suggests Beijing is less worried about U.S. political pressure and more concerned with helping the country's exporters, currently reeling from sliding European demand (the yuan is on the rise vs. the euro).
Depreciation pressure on the yuan may become so great that Chinese currency intervention will soon be to prop up the currency's value, says a Ministry of Commerce researcher. "The yuan exchange rate (could) face a test like during the East Asia financial crisis of 1997-98," he says.
Deutsche Bank carries out the first cross-border yuan payment transaction under a trial scheme to make it much easier for businesses to settle trade in the renminbi. It's all part of China's step-by-step plan to internationalize the currency.
Conditions are ripe to open up China's capital account, according to a front-page article in the PBOC-backed Financial News, which cited several government officials and scholars. The removal of many of the capital controls keeping the yuan from being fully convertible would mark a major milestone in China's reform program.
"Conditions are extremely favourable for promoting yuan convertibility on the capital account," says China's top securities regulator. However, the move towards freeing the renminbi will still be gradual, and even after it becomes fully convertible, the government may still use temporary capital controls in times of crisis. Some remain skeptical.
Beijing's talk about "internationalization" of the yuan may be a bluff, contends Izabella Kaminska, designed to maintain the illusion of China as a good investment destination, not an economy on the brink of collapse. Markets are calling, accelerating capital outflow from the country and pricing in continued depreciation of the yuan over the next year.
"Renminbi depreciation is no longer such an unlikely idea," writes Robert Cookson, noting even Tim Geithner is softening his robotic calls for the yuan to rise further. HSBC's Paul Mackel, formerly a big bull on the currency, speaks of a "new phase ... a future in which the currency is no longer structurally undervalued."
"Why did 10-year Treasurys yield 14% under the vice-like grip of iron-man Volcker, but yield just 1.8% under ... Weimar-like Bernanke," asks Hugh Hendry, defining his weapons in the global macro business as irony and paradox. Hendry's latest investor letter describes China's epic, credit-fueled binge, and why the crisis that started in the U.S. and moved to Europe, is about to end in Asia - and how he's playing it by buying CDS on Japanese corporations.
The People's Bank of China allows the yuan to hit a record against the dollar for the second day in a row, setting the rate at 6.2787. The move follows more calls yesterday from Timothy Geithner to allow the renminbi to appreciate further, but comes despite a slowdown in China's economy.
The PBOC raises its fixing for the yuan to 6.2829 per dollar, the strongest level since it ended the peg in July 2005. Analysts caution against reading another bout of yuan appreciation into the action, instead noting Beijing often makes such moves ahead of high-level meetings with Washington.
"2015 is not possible in my view," says John Greenwood of Chinese officials' floating of that year for making the yuan fully convertible. Greenwood helped design the HKD peg to the greenback in 1983 and says any talk of breaking the peg needs to stay on hold until after the yuan becomes convertible.