Tuesday, August 11, 2015

8/11/15 Still Safe and comment on the Chinese yuan devaluation of less than 2%

The Chinese yuan was simply too strong.  Not only is it pegged to the dollar which had gotten stronger against virtually all other currencies, the Chinese had strengthened the yuan to the dollar by about 2 yuan in response to criticism they were manipulating their currency.  The yuan is still strong. I wonder if more devaluation is coming.

China's foreign reserves stopped growing in 2014 and started to decline.  To me that means their exports have been weak.  They also started having some significant capital outflows.  Outflows like that mean the yuan was so strong Chinese wanted to use this strength to buy assets in the world. Private parties certainly have purchased a lot of US real estate.

I have been trying to understand global capital flows and haven't found any authors that could really explain it to slow learners like me.  On the surface it looks like simple accounting of current and capital accounts of each country.  I find the details complex.

So China is selling Treasuries in a complete reversal of decades of buying them.  They bought Treasuries with dollars purchased with Yuan that was probably printed for just that purpose.  (I think that is shorting the Yuan).  This kept the Yuan low relative to the dollar.  Now they are selling Treasuries for dollars and buying Yuan which reduces the quantity of Yuan in the process.  (A short squeeze).  Lower supply, higher price.  And higher price of Yuan is hurting, if not killing their exports.

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