China is going to war!
By Mike Larson
Money and Markets
China is going to war! Not over islands in the South China Sea, but over the value of its money.
The People’s Bank of China launched an aggressive salvo overnight, devaluing the country’s yuan currency by 1.9%. That may not sound like much, but in the world of currencies, it’s huge. As a matter of fact, it’s the single-biggest devaluation since China adopted its current monetary system in 1994.
The devaluation comes as China’s economy and financial markets are increasingly on the rocks. Growth is slowing. Bad debts are rising. Exports just plunged by more than 8%, more than five times as much as economists expected. And the stock market has been tanking, suffering a series of huge swings the likes of which we haven’t seen in years.
Why is China taking this step? The PBOC claims it’s part of an effort to make the yuan’s pricing more market-based, and increase currency market flexibility. It said it would be a one-time move.
China is looking to give its exports a lift on international markets.
But that’s hogwash. The real reason it’s devaluing is the same reason several other combatants in the ongoing global currency war are doing it: To give their exporters a competitive advantage.
Think about it this way. Cutting the value of your currency is like running a sale on your goods. You’re telling the world: Buy from us … everything we sell is now 1.9% cheaper.
The problem, though, is that it also makes goods from all your competitors relatively more expensive. So all your Asian neighbors panic, and are forced to launch their own competitive devaluations to avoid suffering a competitive disadvantage. That’s why a basket of Asian currencies tanked the most since 2008 after China’s news hit.
At the same time, think about what signal you’re sending to global investors by devaluing. You’re basically telling them your economy stinks. Not only that, but you just made every bond, stock, or other asset those investors own that’s denominated in your currency worth 1.9% less.
So what are those investors going to do? They’re going to sell, that’s what. One estimate in this Bloomberg story is that every 1% decline in the yuan against the dollar alone leads to roughly $40 billion in outflows.
China has a huge pile of foreign exchange reserves – around $3.7 trillion. So it can withstand the pressure for a while. But those reserves have already dropped for four straight quarters, by about $300 billion in total. Worries over accelerating capital flight could reverberate through global capital markets.
“I can remember distinctly what happened the last time a major Asian currency crisis broke out in 1997-98.”
Moreover, I’ve been around the block for many, many years. I can remember distinctly what happened the last time a major Asian currency crisis broke out in 1997-98.
A wave of competitive devaluations swept through Thailand, Indonesia, Malaysia and South Korea. Then the crisis spread to Russia, and ultimately to U.S. stocks. The Dow Industrials plunged almost 2,000 points, or more than 20%, in just a few months in 1998 alone. And that was when the U.S. economy was in fundamentally much stronger shape than it is now.
Finally, this move is sure to worsen U.S.-China relations. U.S. manufacturers have already been suffering from a rising dollar, and politicians have lambasted China in the past for manipulating its currency to give its companies a relative advantage. This is going to increase those tensions significantly, and raise the possibility of retaliatory “trade war” type actions.
Bottom line: The capital markets were already getting more volatile and risky, as I’ve been warning for a few months. Now China is launching its most aggressive currency war in decades – threatening to add even more uncertainty and risk to the mix. So if you haven’t taken protective action, now may be a very good time to do so.
So what do you think about this move by China? Is the global currency war going to get worse now? What does it mean for the U.S. dollar, U.S. stocks, and your investments? And how about the politics of the move? Will U.S. officials (and presidential candidates) threaten retaliatory action in response? What will that mean for the markets?
https://mail.google.com/mail/?hl=en&shva=1#inbox/14f1e78c0aaa552e
Money and Markets
China is going to war! Not over islands in the South China Sea, but over the value of its money.The People’s Bank of China launched an aggressive salvo overnight, devaluing the country’s yuan currency by 1.9%. That may not sound like much, but in the world of currencies, it’s huge. As a matter of fact, it’s the single-biggest devaluation since China adopted its current monetary system in 1994.
The devaluation comes as China’s economy and financial markets are increasingly on the rocks. Growth is slowing. Bad debts are rising. Exports just plunged by more than 8%, more than five times as much as economists expected. And the stock market has been tanking, suffering a series of huge swings the likes of which we haven’t seen in years.
Why is China taking this step? The PBOC claims it’s part of an effort to make the yuan’s pricing more market-based, and increase currency market flexibility. It said it would be a one-time move.
China is looking to give its exports a lift on international markets.
But that’s hogwash. The real reason it’s devaluing is the same reason several other combatants in the ongoing global currency war are doing it: To give their exporters a competitive advantage.
Think about it this way. Cutting the value of your currency is like running a sale on your goods. You’re telling the world: Buy from us … everything we sell is now 1.9% cheaper.
The problem, though, is that it also makes goods from all your competitors relatively more expensive. So all your Asian neighbors panic, and are forced to launch their own competitive devaluations to avoid suffering a competitive disadvantage. That’s why a basket of Asian currencies tanked the most since 2008 after China’s news hit.
At the same time, think about what signal you’re sending to global investors by devaluing. You’re basically telling them your economy stinks. Not only that, but you just made every bond, stock, or other asset those investors own that’s denominated in your currency worth 1.9% less.
So what are those investors going to do? They’re going to sell, that’s what. One estimate in this Bloomberg story is that every 1% decline in the yuan against the dollar alone leads to roughly $40 billion in outflows.
China has a huge pile of foreign exchange reserves – around $3.7 trillion. So it can withstand the pressure for a while. But those reserves have already dropped for four straight quarters, by about $300 billion in total. Worries over accelerating capital flight could reverberate through global capital markets.
“I can remember distinctly what happened the last time a major Asian currency crisis broke out in 1997-98.”
Moreover, I’ve been around the block for many, many years. I can remember distinctly what happened the last time a major Asian currency crisis broke out in 1997-98.
A wave of competitive devaluations swept through Thailand, Indonesia, Malaysia and South Korea. Then the crisis spread to Russia, and ultimately to U.S. stocks. The Dow Industrials plunged almost 2,000 points, or more than 20%, in just a few months in 1998 alone. And that was when the U.S. economy was in fundamentally much stronger shape than it is now.
Finally, this move is sure to worsen U.S.-China relations. U.S. manufacturers have already been suffering from a rising dollar, and politicians have lambasted China in the past for manipulating its currency to give its companies a relative advantage. This is going to increase those tensions significantly, and raise the possibility of retaliatory “trade war” type actions.
Bottom line: The capital markets were already getting more volatile and risky, as I’ve been warning for a few months. Now China is launching its most aggressive currency war in decades – threatening to add even more uncertainty and risk to the mix. So if you haven’t taken protective action, now may be a very good time to do so.
So what do you think about this move by China? Is the global currency war going to get worse now? What does it mean for the U.S. dollar, U.S. stocks, and your investments? And how about the politics of the move? Will U.S. officials (and presidential candidates) threaten retaliatory action in response? What will that mean for the markets?
https://mail.google.com/mail/?hl=en&shva=1#inbox/14f1e78c0aaa552e
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