It would seem that the mainstream business/financial media is suddenly catching on to the implications of a sudden Chinese yuan devaluation and its ability to roil global markets. Tariff retaliation is now the dominant cause-and-effect extrapolation given.
However, is this a form of some silent intent and practice that many are trying to explain? Or is this something far more meaningful that everyone seems to be missing? And by "meaningful," I mean:
Both have the same initial effect, but both have very different endings, i.e., one may be controllable (and that is debatable), while the other makes "A bull in a china shop" scenario appear as wishful thinking.
I am of the opinion, and have been for some time, that the current gyrations in the USD/CNY cross-rate has not come via some masterful game of Go. On the contrary, what I believe has been happening is that if there is any sort of "game" going on, it is based more in the politburo's realization that they have lost control of their currency and are now trying frantically front-run editorially what is happening via its house organs and more. The reasoning is simple: if retaliation for tariffs was to use the currency as a weapon, then why intervene at all?
For China has (as I've explained previously) the valid argument that as the U.S. dollar was weakening since the end of 2016, China has allowed its currency to appreciate over that entire span and even into this year (i.e., 18 months give or take). But they haven't.
Here's what I said earlier in July. To wit:
My opinion of course, but it's based far more on business acumen than any academic interpretation can muster.
China is now visibly struggling to keep all the "spinning plates" of financial engineering aloft, but they are beginning to wobble miserably.
The Shanghai Composite Index has now moved into technical Bear Market status (e.g., down 20%.) The Yuan, whether by stealth devalue or outright politburo control loss is within spitting distance of panic levels. (e.g., 6.70 USD/CNY cross-rate) Above 6.70 and the race for all out currency panic begins in earnest (e.g., 7.00)
In China their leader Xi Jinping was recently voted in as "leader for life." I have written about this prior where I made the argument that this will allow him to control the populace with an iron fist should the economy begin to falter, then runaway downhill. I also argued it was the reasoning why he pushed for it. I believe a difinitive answer to that assessment will be forthcoming in the very near future.
Yes, many will state that the current Trump administration will be tarnished should the economy begin to falter. That may be true, but it may also be false, and here's why...
Should China suddenly falter with either a massive currency devaluation, whether directed via the politburo, or just from market forces, sending contagion knock-on effects reverberating globally will be just the catalyst (as well as straw-man) the administration can (and more likely, will) use to state something akin to, "See, it was China all along benefiting on our lousy trade policies. The more we asserted fairness, the quicker they fell apart. See, they can't compete with us unless it's based on tying our hands, so now we need to begin rebuilding right here, first!"
The reason for the yuan appreciation (conjecture, of course) had nothing to do with anything the politburo was doing and had everything to do with dollar weakness.
China, for that time being, was given a gift in the form of a respite (i.e., the dollar weakening into an ill-perceived Trump turmoil).
And the moment tax policies became law, and with the Federal Reserve, along with other central banks, beginning any real quantifiable Quantitative Tightening (QT) process and raising of interest rates? China's currency woes, along with its enormous credit malfeasance, began coming back into the spotlight. And it's not been a pretty picture.
Here's just one of the latest snapshots in the family album. Again, to wit:
As you can see, the 6.70 did not hold (the bars/candles represent daily intervals) despite openly stated (or plainly interpreted, "invisible hand") interventions.
We are now quickly approaching what was deemed by the politburo via openly stated intervention back in 2017 to defend the 7.00 demarcation level. And as we get closer, the politburo seems to only now be becoming more openly vocal, as well as employing even more resources to quell (e.g., kill) as many (e.g., in toto) yuan shorts as possible. And there lies the 64 trillion yuan question: Why?
Here's what I believe: The further interjection of politburo monetary manipulation, in all its forms (e.g., reserve rate cuts, credit extensions, buying its currency, etc.) in such open and easily witnessed fashions, all the while being nearly silent (meaning vocally) to its currency weakening, along with doing so at levels well below its openly declared demarcation level of 6.70, requires one to think a bit deeper.
For if a currency devaluation (and a sever one at that) would be seen as a logical counter move in retaliation against any tariffs, then why intercede so soon? Would not above 7.00 be a fair level to start? Especially if it would probably cripple your adversary in the short run (i.e., cause some form of market rout)? Unless the "game" is really nothing about tariffs and such but has everything to do with the long game that's truly China's goal: making the yuan the reserve currency displacing the dollar.
To restate differently, if that is truly the "only game in town worth playing," then China's current hodge-podge of interventions begins to make more sense than trying to view it solely through the prism of tariffs and trade, i.e., China does not care ("care" being a relative term) if a trade war or anything else disrupts markets. What they are scared to death of is any upheaval that causes people, countries, and businesses to rush back into the U.S. dollar in the form of safety-related trades and once again put the "gold standard" for implied safety back into U.S. hands, as well as coffers.
China's main goal for world trade domination and influence hinges on making the yuan the reserve currency of global affairs. It has worked diligently, at every turn possible, to do just that. Getting its currency to be included into the basket of currencies known as the SDR was of a paramount pursuit. And on October 1, 2016 it finally attained it. Then, just one month later, the world of changed.
At first it appeared, again, for that moment, that China would be able to just sit back and allow the political infighting within the U.S., along with what appeared to be the globe's reluctance for further faith (as well as use) in the dollar to play out its own demise. And then tax reform passed, interest rate hikes began in earnest, QT became manifest, and more. And suddenly trade was not only on the table, but all prior trade deals were straight-armed right into the dust bin. And what China had previously taken for granted over the past 18 months has been nearly completely eviscerated (currency-wise) in all of about 90 days, along with any and all counter-measures in dealing with trade issues previously assumed.
Now those prior assumed effective countermeasures are being countered to a point of two, if not 10-to-1! i.e., immediate countermeasures to their counters. It's now a very serious (as well as costly) game of tit-for-tat. Especially for China. The reasoning is simple: they are now faced with using what may be the only (and last) effective retaliatory weapon for trade disputes in their arsenal, which is a devaluing of their currency.
But the problem is this: If they do, it may be much like the "nuclear option," it's always described to be, i.e., holds great power but may ensure it hurts the user just as much as on whom it's used. Should the Chinese authorities suddenly allow for a massive devaluation under the current global circumstances, it's very possible (if not probable) that it will wipe out, in its entirety, all the work and forbearance they have worked so diligently for these past two decades. Meaning, say goodbye to the yuan having any implied reserve status for who knows how long.
In a communist-controlled country, civil unrest will be met with far more brutality, if needed, via an administration that is now cemented into "leader for life" status. Should trade wars cause unrest within the populace, it will be unwanted, yet China has shown that not only does it have the tools to control unrest (just look to prior examples), but it's also willing to use those tools as it sees fit.
Remember, any resulting unrest from trade can also be blamed on outside forces through propaganda, i.e., it's the U.S. causing all this pain!" etc. Yet, when it comes to its currency initiatives, along with its true long-range plans/goals of superseding any or all prior? The propaganda story is not within China's control.
A rout based in currency flight out of the yuan and into the dollar, along with a global market rout that many may see as the causation being China's lack of being able to control its currency is something - and I'll wager just about the only thing - that is keeping the current politburo awake at night. That's a story China cannot afford to take shape at any price, for if they lose any perceived stability in the yuan at this juncture, it may put all their fight for gains back by decades - and many at that.
We're now closing in on those levels that may decide it all, again, where all control is not only perceived as lost but proven to be so.
As always, we shall see.
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