China Ignites Currency Wars

China and the Yuan Ignited Currency Wars

(TOPICS: Devaluation of currency, Chinese yuan, Currency wars, Central Banks, China meltdown)

In 2015, China and the Yuan have created tremendous volatility in global stock markets, currencies and currency markets. Billionaire investor George Soros said China’s economy is headed for a hard landing, a slump that will worsen global deflationary pressures, drag down stocks and boost U.S. government bonds. “A hard landing is practically unavoidable,” he said in an interview with Bloomberg Television’s Francine Lacqua from the World Economic Forum in Davos on Thursday. “I’m not expecting it, I’m observing it.” He added that the country’s unsustainable debt burden and capital flight are both signals of a hard landing. China had about $843 billion of capital outflows in the 11 months through November, according to a Bloomberg Intelligence estimate. In September the Peoples Bank of China (PBOC) purposely de-valued the yuan to:

• Attempt to stabilize its markets
• Enable themselves to more easily pay off debt and sell USDs & Treasuries capitalizing on the high value of the USD
• Eliminate the IMF’s concern that the Yuan was over-valued, as they were deciding whether to add the Yuan to its basket of currencies and to the World Bank’s list of reserve currencies (which the IMF did.
• Make Chinese exports less expensive and more competitive in the world market place

In the second week of January the PBOC again intervened and lowered the value of the Yuan. Both times, the world market place, fearing further decline, reacted by selling the yuan and Chinese securities, further lowering the value of the Yuan. Many nations took actions which lowered the value of their own currencies to stay competitive; this is where you get the term “currency wars.”

One of the tools being used by central banks to combat deflation and improve exports is the de-valuing of currency, because a strong currency means that a nation’s export products are more expensive and a weaker currency means their exports are less expensive.  David Woo, head of global rates and currencies research at Bank of America Merrill Lynch in New York said: “There is a growing consensus in the market that an unspoken currency war has broken out … The reason why this is a war is that it is ultimately a zero-sum game — someone gains only because someone else will lose … The standard view on war-mongering is that by easing monetary policy, central banks from Asia to Europe are hoping to weaken their currencies to boost exports and import prices. Trade rivals then retaliate, creating a spiral of devaluations as witnessed in the 1930s … A weak currency might provide a short-term boost to the countries engaging in currency devaluation, however, if everyone is playing the same game, what we all will end up with is more and higher FX volatility. This in turn will likely exact a toll on global trade and capital flows.”  The yuan was on center stage in 2015, especially in the last quarter when:

• The World Bank added the Chinese Yuan to the list of world reserve currencies used by the nations of the world to borrow and create infrastructure, and the IMF added the Yuan to the Special Drawing Rates (SDR) currency basket: http://www.imf.org/external/np/exr/facts/sdr.htm This will reduce the amount of USDs currently used by the World Bank & IMF.
• The Asian Infrastructure Investment Bank (AIIB) became fully operational Jan 1, 2016 and the US is the only major nation which is not a member of this bank. The AIIB will compete with the current US controlled World Bank and the USD will not be an underlying currency in any of the AIIB’s loans or financing, thereby further reducing the use of the USD in the global market place.

In less than two months after being declared a reserve currency, the yuan de-pegged from the USD, as have many other Asian currencies. In January, the European Central Bank (ECB) Chairman promised increased QE, which means further decreasing their already negative rate of .30 percent and/or increasing the amount of euros being printed to purchase more bonds. On Jan 29th, the Bank of Japan (BOJ) joined the ECB and lowered interest rates into negative territory. Both the euro and the yen devalued as they attempted to spur their markets and keep their currency values competitive with the yuan, sending the USD higher. These changes will also undoubtedly reduce the use of the USD in the global market place, as well as make US products more expensive.

Inside the BOJ’s Negative-Rate Strategy (1-29-16) Bloomberg Video
http://www.msn.com/en-us/money/videos/inside-the-bojs-negative-rate-strategy/vi-BBoRdjr
Bank of Japan Adopts Negative Rates, Keeps Asset-Buying Target (1-29-16) http://www.bloomberg.com/news/articles/2016-01-29/bank-of-japan-adopts-negative-interest-rates-by-vote-of-5-4
100s of Billions of Dollars Have Fled China Now What (1-29-16) WSJ
http://www.wsj.com/articles/hundreds-of-billions-of-dollars-have-fled-china-now-what-1454017955
Beijing Gets Desperate-Throws Regulatory Dragnet at Fleeing Capital (1-28-16) WSJ
http://www.wsj.com/articles/china-sharpens-efforts-to-halt-money-outflow-1453898254
Aussie, Kiwi Go from Worst to Best as Traders Adjust Easing View (12-28-15) http://www.bloomberg.com/news/articles/2015-12-29/aussie-kiwi-go-from-worst-to-best-as-traders-adjust-easing-view
Currency Traders Prepare for More Turmoil Ahead of Fed, BOJ Meetings (1-23-16) http://www.bloomberg.com/news/articles/2016-01-23/currencies-turmoil-respite-may-be-brief-as-fed-boj-set-to-meet
Kuroda Advises China to Impose Capital Controls to Defend Yuan (1-23-16) http://www.bloomberg.com/news/articles/2016-01-23/kuroda-advises-china-to-impose-capital-controls-to-defend-yuan
Soros China Hard Landing Is Practically Unavoidable (1-21-16) Bloomberg Video
http://www.bloomberg.com/news/videos/2016-01-21/soros-china-hard-landing-is-practically-unavoidable
Goldman’s Cohn Says China Will Probably Have to Devalue Currency (1-22-16) http://www.bloomberg.com/news/articles/2016-01-22/goldman-s-cohn-says-china-will-probably-have-to-devalue-currency
Currency War Revival Is Alive and Well (1-16-16)
http://www.bloomberg.com/news/articles/2016-01-16/currency-war-revival-seen-by-state-street-after-yen-euro-rally
China’s Choice Devalued Yuan or Increased Stimulus (1-13-16) Bloomberg Video
http://www.bloomberg.com/news/videos/2016-01-13/china-s-choice-devalued-yuan-or-increased-stimulus
PBOC’s Warns Currency Speculators in Yuan Defense (1-12-16) Bloomberg Video
https://uk.finance.yahoo.com/video/pbocs-warns-currency-speculators-yuan-105800485.html
China Burned Through $120 Billion in FX Reserves in December Devaluation Crisis Straight Ahead (1-8-16) by The Telegraph | http://www.telegraph.co.uk/finance/china-business/12088033/Capital-flight-pushes-China-to-the-brink-of-devaluation.html
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