China currency falls for 2nd day after surprise devaluation

[webfact]

China currency falls for 2nd day after surprise devaluation
JOE McDONALD, AP Business Writers
CHRISTOPHER S. RUGABER, AP Business Writers

BEIJING (AP) — China's currency fell further Wednesday following a surprise change in its exchange rate mechanism that rattled global markets and threatens to fan trade tensions with the United States and Europe.

The central bank said the yuan's 1.9 percent devaluation Tuesday against the U.S. dollar, which was its biggest one-day fall in a decade, was due to changes aimed at making the tightly controlled currency more market-oriented. That raised the prospect of still more declines, which would help struggling Chinese exporters at the expense of foreign competitors and might shore up flagging economic growth.

On Wednesday, the yuan dropped another 1.6 percent. In theory, it could drop 2 percent every day given it can trade 2 percent around a rate that is set based on the previous day's closing value.

Until now, China has set the yuan's value each day based on a basket of currencies that is believed to be dominated by the U.S. dollar. That meant the yuan rose as the dollar jumped over the past year, hurting its exporters and raising the threat of politically dangerous job losses. Exports in July plummeted by an unexpectedly steep 8.3 percent from a year earlier.

The People's Bank of China promised Tuesday to keep the exchange rate "basically stable," but Wednesday's decline prompted suggestions the yuan is likely to fall further.

The yuan is likely to see "continued strong influence" from the central bank, with Tuesday's change "probably marking the start of an engineered depreciation," said Mizuho Bank in a report.

Many economists cautioned against seeing Beijing's move mainly as an effort to benefit its exporters. They note that China's currency, left to market forces alone, would have declined in value in recent months.

The depreciation "will not change the gloomy picture of global demand," said Vincent Chan of Credit Suisse in a report. "The 2 percent devaluation cannot provide any meaningful help, but it caught the market by surprise."

U.S. stocks tumbled Tuesday, with the Dow Jones industrial average closing down 212 points.

China becomes the third major trader to take actions that lower the value of its currency. Initiatives by Japan and the European Union over the past two years depressed the yen and euro by a wider margin than this week's decline in the yuan.

The yuan, also known as the renminbi, is allowed to fluctuate in a band 2 percent above or below a rate set by the People's Bank of China based on its currency basket.

The bank said that starting Tuesday, the daily target will be based on the yuan's closing the previous day and information from traders about supply and demand for the currency.

The change presented a dilemma for China's trading partners, who have called repeatedly for Beijing to let market forces set its exchange rate but don't want to see the yuan weaken.

It sparked complaints in Washington, where members of Congress have long complained Beijing manipulates its currency to gain a trade advantage.

"For years, China has rigged the rules and played games with its currency," said U.S. Sen. Chuck Schumer. "Rather than changing their ways, the Chinese government seems to be doubling down."

The U.S. Treasury Department's response was more measured.

"China has indicated that the changes announced today are another step in its move to a more market-determined exchange rate," a department statement said.

The International Monetary Fund said the change "appears a welcome step" to give market forces a bigger role.

"The exact impact will depend on how the new mechanism is implemented in practice," said an IMF statement. "We believe that China can, and should, aim to achieve an effectively floating exchange rate system within two to three years."

The IMF said the latest change would have no effect on the decision about whether to add the yuan to the dollar, the euro, the yen and the British pound in the basket of currencies used to set the value of the Fund's in-house currency, called Special Drawing Rights. The IMF staff recommended last week that China wait until at least October 2016 to join. The Fund's board is due to consider that recommendation in October.

China's economic growth has slowed to an annual rate of just 7 percent, which is healthy for most countries but far below the previous decade's double-digit pace.

The Federal Reserve is expected to boost the short-term interest rate it controls later this year. A rate hike would likely raise the value of the dollar, which has already jumped about 14 percent in value in the past 12 months against a basket of foreign currencies.

The rising dollar has hurt U.S. exporters by making their goods costlier abroad, and China's devaluation could further complicate the Fed's decision on when to raise rates. By making Chinese goods comparatively cheaper in the United States, a weaker yuan would push already-low U.S. inflation even lower.

The Fed wants to be "reasonably confident" that inflation is returning to its 2 percent target before raising rates. Inflation has risen just 1.3 percent in the past 12 months.

Michael Feroli, an economist at JPMorgan Chase, suggested the dollar's rise poses a concern for some Fed officials, known as doves, who have been reluctant to raise rates. Should the U.S. economy stumble in the coming weeks, "dollar strength would only further embolden the doves at the next meeting" in September, Feroli said.

Still, Feroli said, "we think this a minor stumbling block for a September" rate increase.

USB economist Tao Wang said Beijing would likely move cautiously, but investor expectations of further weakening "could quickly become entrenched" and cause the yuan to "depreciate quite quickly and significantly."

She said that would represent a "sea change in China's exchange rate policy" but would help to support flagging economic growth.
___

Rugaber contributed from Washington. AP Economics Writer Paul Wiseman in Washington and AP Writer Teresa Cerojano in Manila contributed to this report.


-- (c) Associated Press 2015-08-12

[burgdawg]

....get ready everyone. The show is just beginning.

Popcorn anyone?

The gloves are coming off, worldwide.

Two good sources: Death Of Money by Jim Rikards (amazon / google search).

***************************

Jim Willie podcasts: www.goldenjackass.com

Click on "Home" and scroll down. Many excellent free podcasts on current and forward looking global upheaval. Statistician. Knows his stuff. Many correct forecasts.

Pray

[Publicus]

The IMF tells us what we presently need to know about the CCP China currency.

The IMF internal recommendation of last week to the IMF full board of whether to include, beginning in October, the yuan in the global basket of currencies of SDRs, is to wait until October next year, 2016.

What had been an easy walk at the IMF for the CCP Boyz in Beijing is, as of last week's internal IMF recommendation, a 'wait until next year' sudden closing of the door on a currency that had been artificially stable but which is now in an emergency. The emergency is that the yuan must suddenly begun to face the music market.

The yuan is going kaput.

The only reason the Boyz are turning to the market is that they need an excuse to get the yuan down a lot and fast. The CCP Boyz have put on their firehats and they are breaking out the axes.

The only global upheaval btw is that giant imploding sound coming from the mainland China. The major reason we haven't felt anything the past couple of years is that the CCP China is so insulated its problems affect it almost exclusively and entirely. Asean for instance will resume exporting-importing with the Western markets sabai dee mai.

Edited August 12, 2015 by Publicus

[RapidMethod]

Not really news. Maybe it's a huge fall over a couple days for a long time (not 10 years!), but it's not at all unusual. And the yuan was very weak at $1=¥8 until 2008 when it suddenly became quite strong, staying at ¥6.8 for about two years, gradually slid down to ¥6 over four years and for the last two years has been hovering around the ¥6.2 mark. Today it's still very much stronger than it was in 2008 onwards, so maybe it's just a return to a "middle" ground, not to strong and not too weak - who knows?

None of it makes any sense of course

[Publicus]

Not really news. Maybe it's a huge fall over a couple days for a long time (not 10 years!), but it's not at all unusual. And the yuan was very weak at $1=¥8 until 2008 when it suddenly became quite strong, staying at ¥6.8 for about two years, gradually slid down to ¥6 over four years and for the last two years has been hovering around the ¥6.2 mark. Today it's still very much stronger than it was in 2008 onwards, so maybe it's just a return to a "middle" ground, not to strong and not too weak - who knows?

None of it makes any sense of course

It is radical the CCP Boyz in Beijing have had to in any way loosen their extremely tight control over their cherished yuan in day to day trading and, most importantly, in the long term.

The Boyz themselves cannot control the yuan as they desperately need to do at the present time, which is to depreciate radically, rapidly without the devaluation spinning out of control.

The Boyz have to throw the yuan to the market, albeit under some control. The concern globally is that the devaluation will become a runaway one, which would crash the CCP China economy in a New York minute.

The Boyz had tried to get under the October bar of the IMF to slip the yuan into the IMF basket of SDR currencies to become a global reserve currency. The internal IMF recommendation made just last week as this yuan crisis was precipitating, to delay the full IMF Board decision until October 2016, cut off the Boyz at the knees and brought this on well before its time.

The CCP Boyz are risking a yuan freefall which, if it accelerates, could only be stopped if they hit a branch on the way down to hang 'em up on it.

[GiantFan]

Moved some money back today at 6.44/$. A few days too late. Not so bad vs. the THB.

[NeverSure]

China is in a serious liquidity crisis as its banks run out of liquidity due to bad loans. There is the shadow banking system that while not official is still a major part of the economy.

In addition the Chinese have been taking extraordinary steps to try to prop up the stock market - just another liquidity crisis.**

Foreign money has been leaving China by the truckload as investors convert back to other currencies - just another liquidity crisis. All of this while ghost cities sit empty with $trillions owed on them and other things to banks. Bad loans will take liquidity out of banks faster than a bank run.

China is no longer in control of its currency although it would like to be. Its fear is about how low it could go. Currency value is market value and the buyers will tell China what that currency is worth.

China can't prop up it's bank liquidity crisis, it's stock market crisis and its falling export crisis all at the same time.

** Remember, China doesn't really own much. It is the West's Beotch^R, manufacturing things invented in the West for the West using tooling and techniques and even raw materials of the West at the pleasure of the West. The US or the EU or Japan alone, any one of them could shut China down just by adding another 30% tariffs on imports from there. ATM the US has no tariffs as in Free Trade but that could change if The Donald or others get their way.

"We live in interesting times."

^^^ Good posts, Publicus. Cheers.

[Time Traveller]

Not really news. Maybe it's a huge fall over a couple days for a long time (not 10 years!), but it's not at all unusual. And the yuan was very weak at $1=¥8 until 2008 when it suddenly became quite strong, staying at ¥6.8 for about two years, gradually slid down to ¥6 over four years and for the last two years has been hovering around the ¥6.2 mark. Today it's still very much stronger than it was in 2008 onwards, so maybe it's just a return to a "middle" ground, not to strong and not too weak - who knows?

None of it makes any sense of course

You are mistaken. This is big news. Basically you can not have an fixed exchange rate when you are an exporting economy that is undergoing slowing trade. The fact that the leaders acknowledged that and acted on it is significant.

On Monday, they said the devaluation of 1.9% was a one time event. Then on Tuesday they devalued again! The trick is never listen to what the officials say, and act on what they do.

As you said the RMB was much weaker in the past, and you can be sure they would love to devalue 10% or 15% (maybe back to 7 to the dollar). The small first move would likely have insignificant effect on their exports, but it's to sound an alarm bell to all Chinese corporations with dollar denominated debts as well as the carry trade crowd that the tide has changed. So they move in small steps over a period of time to avoid the crazy move that happened with the Swiss Franc earlier this year when the Swiss bank abandoned it's peg against the Euro.

Edited August 12, 2015 by Time Traveller

[NeverSure]

It's most likely that the first day was the Chinese, and the second day was the marketplace. The Chinese don't completely control the value of their currency once the market smells blood in the water. The currency has a marketplace which will now tell the Chinese what their currency is worth.

After a couple of years of China trying to but the best face on what's happened in China, the global market has awakened and this will be interesting times.

Cheers.

[blazes]

Good for gold, though.....

[bassman]

Good for gold, though.....

Why? Yuan does not effect the price of gold it is the US dollar. I would expect gold to drop as long as the $ strengthens.

[Cake Monster]

With approximately 15% of Thai exports going to China, this will make it even harder on the already badly bruised Thai Export sector to gain traction after many months of falling figures.

Maybe even more outflows from the SET to come, and a weaker Baht.

[blazes]

Good for gold, though.....

Why? Yuan does not effect the price of gold it is the US dollar. I would expect gold to drop as long as the $ strengthens.

Yes, you're right about the dollar's strength (usually) affecting the price of gold (negatively).

I meant to suggest that the general instability of fiat currencies at the moment is "good for gold", the only true safe haven, historically.

[mania]

Good for gold, though.....

Why? Yuan does not effect the price of gold it is the US dollar. I would expect gold to drop as long as the $ strengthens.

Any failing/flailing in any major fiat currency has an effect on Golds price

Gold is not only priced in nor driven by the USD alone

Fear also affects gold prices greatly...fear of war..economic crisis etc.

[webfact]

UPDATE:

China yuan guiding rate set lower for third day

BBC: -- China has set the guiding rate for its yuan currency lower for third consecutive day.

Thursday's rate was set 1% down against the dollar, a smaller margin than the shock cuts earlier in the week.

The bank had on Tuesday announced it would start setting the daily rate based partly on the previous day's trading, bringing the yuan closer to a free-floating currency.

Full story: http://www.bbc.com/news/world-asia-china-33900274


-- BBC 2015-08-13

[Srikcir]

Good for gold, though.....

Why? Yuan does not effect the price of gold it is the US dollar. I would expect gold to drop as long as the $ strengthens.

Yes, you're right about the dollar's strength (usually) affecting the price of gold (negatively).

I meant to suggest that the general instability of fiat currencies at the moment is "good for gold", the only true safe haven, historically.

As of July 2015 China is the world's 5th largest holder of gold (based on 1,658 tonnes official gold reserves and excludes private reserves), China will be very tempted to begin some liquidation to USD's in order to keep the RMB from collapse. That will trigger a further decrease in gold value, perhaps below US$1,000 per troy ounce.

Gold might be a bargain in another month or so below US$1,000/oz.

Meanwhile, China isn't selling off its US Treasury Bonds - one of its SOLID foreign investments.

[Publicus]

US Treasury for the past 10-15 years has twisted the arm of the CCP Boyz in Beijing to gradually convert the yuan to a free market float so it can appreciate. A full or substantial yuan appreciation would rectify the global trade imbalance the Boyz have been causing all these years by keeping the yuan artificially low (not only the US trade deficit with Beijing).

While this depreciation introduces new but limited market factor yuan-forex calculations, it also complicates things by going in the completely opposite direction of rectifying global trade imbalances.

The depreciation also keeps the Boyz focused on the still significant but dwindling export economy rather than implementing reforms to create greater household income and a consumer based economy.

Today's action reducing the still sharp daily rate of depreciation is the Boyz' attempt to persuade global markets the sudden and rapid depreciation will not become a runaway depreciation. So as the sun rose this morning the Boyz still had their firehats on.

Edited August 13, 2015 by Publicus

[Publicus]

Good for gold, though.....

Why? Yuan does not effect the price of gold it is the US dollar. I would expect gold to drop as long as the $ strengthens.

Yes, you're right about the dollar's strength (usually) affecting the price of gold (negatively).

I meant to suggest that the general instability of fiat currencies at the moment is "good for gold", the only true safe haven, historically.

As of July 2015 China is the world's 5th largest holder of gold (based on 1,658 tonnes official gold reserves and excludes private reserves), China will be very tempted to begin some liquidation to USD's in order to keep the RMB from collapse. That will trigger a further decrease in gold value, perhaps below US$1,000 per troy ounce.

Gold might be a bargain in another month or so below US$1,000/oz.

Meanwhile, China isn't selling off its US Treasury Bonds - one of its SOLID foreign investments.

The CCP Boyz in Beijing have used to date almost $400 billion of their huge forex reserves to support the yuan and the export sector. This points to the serious nature of the present emergency as the Boyz had always dealt in a few hundreds of millions at the very most in jiggling what is now their $3.7 Trillion of reserves.

So if the Boyz decide they can or need to replace the $400 bn and if they sell gold to do it, the market price will of course reflect that too, if that's what happens. Thing is, the Boyz need all the gold they can get their hands on...and then some.