Yuan tumbles for second day as China devalues

[Valin]

CNN Money:

Charles Riley

Aug 12 2015

 

China's central bank allowed the yuan to drop sharply against the U.S. dollar again on Wednesday, sparking the currency's largest two-day decline in decades. The move comes one day after the People's Bank of China shocked markets by changing the way the yuan's daily trading band is calculated, and executing a one-time devaluation of the currency. The PBOC sets a daily midpoint for the yuan, around which the currency is allowed to trade within a 2% band. Until Tuesday, the central bank had total control over where the midpoint was set. Going forward, the midpoint will be based on the previous day's closing price.

 

In a sign that China is following through on its plan, the central bank set the yuan's midpoint at 6.3306 on Wednesday -- 1.6% weaker than the previous day's midpoint, but near where the currency last traded. That follows a 1.9% devaluation of the yuan on Tuesday, a move that set off a major sell off on Wall Street. The PBOC, in a statement issued Wednesday, said it would work to keep the exchange rate "basically stable" and that there was "no basis" to believe the yuan would "persistently depreciate." Even with the central bank's reassurances, the yuan traded as much as 1.9% lower against the dollar on Wednesday. The currency mounted a mild recovery during late afternoon trade. The Wall Street Journal reported that the central bank had intervened, and instructed state-owned banks to sell dollars in an effort to stop the slide.

 

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[Valin]

[Valin]

China’s Sly Devaluation

Aug 11 2015

 

For the past few decades, China’s economic miracle has been a wonder of the world. We’ve seen double digit GDP growth (even accounting for exaggeration in the CCP’s official figures) and the rise of Beijing as a major player in global trade and military power. But after a whirlwind year that saw the value of Chinese stocks more than double, the market is taking some big hits, and the prospects for future growth are dimming.

 

As we’ve followed closely, President Xi Jinping seems to have been battening down the hatches, looking ahead to a period of major financial instability, pretty much since he took office. Now that the storm appears to have arrived, his government is taking radical steps to stop the damage. After the first few days of the collapse, for example, Beijing froze trading on the vast majority of listed companies; in effect, true to authoritarian nature, the Party simply ordered the market not to decline.

And then yesterday, Beijing devalued the renminbi by the largest amount since it switched to its current currency regime in 1994. Calling it a “convenient reform,” Bloomberg offers some solid analysis:

 

 

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But even if this sleight of hand works, that doesn’t solve the basic, structural problem underlying the Chinese market’s recent travails, and it raises questions about how Beijing will react when everybody is eventually forced to admit that most of its self-inflicted bubbles have popped. As Einstein is said to have remarked in a very different context “the great miracle of the universe is that there are no miracles.”