When A 20 Year Policy Ends With SURPRISE! Don't Bet on Gradual

A look back at some of the yuan depreciation coverage here in the past year and earlier.

Back in June, I posted How Did China's Yuan Get So Peg-Like?. There was an article in Bloomberg: Yuan’s Peg-Like Stability Makes China Hottest Asian Carry Trade. Even two months ahead of depreciation, with the yuan starting to show signs of stress, it was "the hottest" Asian carry trade.

As for the new currency basket, it was being discussed back in 2010. China moves slowly.

Last year's 2015 forecast: Scramble To Hedge Dollar Bull Will Fuel Rally in 2015, Yuan Bear Market Is Fissile Material. The big move may come in 2016, but the ground was laid in 2015. I was expecting a rate hike much earlier at the start of the year.

A week before that post: Flexible Yuan Goes Down, Not Up

Today, people believe the yuan is a stable currency with a bias towards appreciation. They expect very little volatility, and almost none on the downside.

The PBOC and China generally have the illusion of control because of their past success. Even the most competent can lose control by believing they control the market. China's leaders appear competent because they are willing to cede control of the economy to the market as it grows in size and complexity. If Chinese leaders suffer from the Fatal Conceit, the yuan will fall. If they open the economy, the yuan is a better bet, but it could also fall due to volatility in the market. The risk today is on the downside, and if its cheap to bet on a move outside of expectations in 2015, I'd take it.

Another week earlier:

I believe economic conditions have favored a weaker yuan at least since 2011 and I do not believe the yuan can appreciate along with the U.S. dollar if a major USD bull market begins. Weakening a currency is not a good solution to economic problems, but China controls the exchange rate. For political reasons as much as economic ones, the yuan is probably overvalued. Simply allowing convertibility would lead to a weaker yuan. If Chinese leaders want a weaker currency, all they have to do is allow greater convertibility. Previous discussions of a weaker yuan here.

Although it might shock the financial world, a slide in the renminbi to 7 versus USD in 2015 would hardly qualify as a major move in the currency markets. The yen has fallen as much in the past three months and euro is down a similar amount in 2014.

Today in the WSJ: Why China Is Loosening the Yuan’s Ties to the Dollar

The Fed is widely expected to raise rates this week amid signs of a strengthening U.S. economy. Meanwhile, China’s economy is going in the other direction, with Beijing cutting interest rates and making other moves to loosen monetary policy and spur slowing economic growth.

A U.S. rate increase could hinder that effort. It likely would make the dollar stronger, forcing China to intervene in currency markets to maintain the peg. That means buying yuan, often from Chinese banks, which effectively takes money out of China’s financial system even as Beijing tries to make more money available to its businesses and consumers.

...“The overvaluation of the renminbi is a root cause of China’s economic ills these days,” said chief economist Lu Zhengwei at China’s Industrial Bank Co.

Related:
Takeaway From China's Sept and Q3 Data: Yuan Devaluation Pressure Rising; Next Shoe Drops After IMF Vote
Lang Xianping Explains Renminbi Devaluation to Studio Audience
In the Yuan Overvalued? This Chart Says Yes
Nobody Expects Yuan Below 6.4
PBOC Propping Up Yuan Ahead of SDR Inclusion
China May Pay A High Price For SDR Push
The Logic of Strategy: Yuan Devaluation and the Road to Trade War
Falling Yuan Socks Debtors; Developers in the Crosshairs
The Informational Power of the Offshore Yuan Exchange Rate
PBOC can't buy a buck; talk of depleted reserves is not alarmist
China's dollar short position
Signs Point to Lower Yuan, But US Treasury Wants Appreciation
Chinese hoard dollars
Chinese Yuan Could Devalue 50% Or More