
China lets yuan break 7-per-dollar level for first time in over a decade - situational87
https://www.reuters.com/article/us-china-markets/china-lets-yuan-break-key-7-level-for-first-time-in-decade-as-trade-war-worsens-idUSKCN1UV061
======
nikhizzle
So trying to parse this out as a non-economist:

\- first order effect: Yuan gets cheaper, meaning non-Chinese can buy more
Yuan per dollar or unit of their currency

\- second order effect: non-Chinese can buy more units of Chinese goods,
making Chinese exports more competitive.

\- second order effect: Chinese can buy less non-chinese goods per Yuan,
weakening the ability of China to import items, but potentially strengthening
the domestic market.

I imagine this will also create some amount of inflation.

An interesting technicality is that Chinese currency trades in two separate,
mainly correlated markets. The onshore market (CNY) is regulated in a very
tight band by the central bank, the offshore market (CNH) is much less
controlled and trades in Hong Kong.

See
[https://www.google.com/search?q=cny+vs+cnh](https://www.google.com/search?q=cny+vs+cnh)
for the linkage.

~~~
JumpCrisscross
> _second order effect_

The main negative effect is capital flight. If the yuan is devalued, _ceteris
paribus_ , an investor holding yuan would prefer to hold anything else. For
example, "in 2015, China ...[devalued] the yuan 2%...[and had to burn] through
$1 trillion in foreign exchange reserves to steady it" [1][2].

This time might be different, given China's tightened capital controls. But
never underestimate peoples' creativity when it comes to moving their money.

[1] [https://uk.reuters.com/article/uk-china-markets/china-
lets-y...](https://uk.reuters.com/article/uk-china-markets/china-lets-yuan-
break-key-7-level-for-first-time-in-decade-as-trade-war-worsens-idUKKCN1UV06A)

[3] [https://www.bloomberg.com/news/articles/2016-01-25/china-
cap...](https://www.bloomberg.com/news/articles/2016-01-25/china-capital-
outflows-climb-to-estimated-1-trillion-in-2015)

~~~
rahimnathwani
"If the yuan is devalued, ceteris paribus, an investor holding yuan would
prefer to hold anything else."

If you didn't sell your CNY at yesterday's price, why would you want to sell
at today's (lower) price?

~~~
JumpCrisscross
> _If you didn 't sell your CNY at yesterday's price, why would you want to
> sell at today's (lower) price?_

Minorly, because tomorrow's price might be lower. Majorly, because even taking
into account the price drop, the present value of the currency-swapped yield
on investments in a foreign currency are greater than those prospects at home.

~~~
rahimnathwani
The first point violates your explicit 'ceteris paribus' assumption. A
devaluation today doesn't on its own provide information about future moves.

I don't understand your second point. Perhaps you could give a simple
illustration?

~~~
nickles
> The first point violates your explicit 'ceteris paribus' assumption.

Not necessarily. The decision of individuals to allocate in a particular
manner can be thought of as a continuous function (IIRC this is called an
indifference curve). In this case, the individual’s preferences (given by this
curve) remain constant. As the relative prices of goods (currency being one)
adjust, the composition of the preferred basket also adjusts. This is
consistent with _ceteris paribus_. If an individual’s preferences were assumed
to change, then the assumption would be violated.

> A devaluation today doesn't on its own provide information about future
> moves.

In general terms, people cite ‘momentum’ as a trading factor. A change in
price today may continue tomorrow. If you consider the feedback loops that
occur as something appreciates or depreciates, it may explain why momentum can
be observed.

In more concrete terms, China has very deliberately kept its currency from
devaluing below this level against the dollar for quite some time. The country
has attempted to undermine short positions against the currency by doing
things like adjusting fixings and overnight rates massively against the shorts
for a brief period. Given that China is now allowing this devaluation to
occur, it signals that the nation has a new exchange target in mind,
presumably lower than the previous one.

------
tedeh
Does anyone have any good links to how the trade war is affecting the Chinese
economy and population? Most everything I read in the western press seems to
mostly concern the "American consumer" and how him/her is hurting due to
higher prices. It would be interesting to hear what's going on on the other
side, too.

~~~
businessinchina
I've run a business in China for over a decade and follow the macroeconomic
situation here closely.

Here's the deal:

The Chinese economy became investment-driven instead of export-driven
following the Great Financial Crisis. Exports are less important to GDP than
real estate construction and infrastructure development (subways, high speed
rail, bridges, etc).

In terms of exports, Europe is the biggest trading partner, not the US. The US
is number 2.

The Chinese economy has a big problem: the government can drive GDP as much as
it wants via state-driven investment and debt, but much of that is
malinvestment and the debt cannot be self-funded. So there is and has been a
large debt problem. This is why the Chinese economy has been slowing and the
government has not found a politically acceptable way to tackle the problem.

The US trade war is basically kicking the Chinese economy while it's already
down, but it's not the key source of the problems here.

~~~
kurthr
It's not the key source of the problem, but the "Trade War" provides a useful
political foil to avert responsibility and perhaps instute harsh remedies.

~~~
duxup
I wonder how that plays if the long rumored debt problems actually create some
sort of financial crisis.

The US as a foil works, but Chinese internal propaganda also talks about their
strength and independence... if there is a serious crisis that hits the
general populations, it's going to naturally raise questions that "If Xi and
Co. made us so strong ... how is it US sanctions alone are to blame for this?"

Obviously there are options there but just from the outside looking in there
seems to be a lot of pseudo "trust in Xi, he makes us strong" propaganda that
would suddenly become problematic.

~~~
lambdasquirrel
We should frankly be terrified the world over. You could well say the
developed world all over has been investment-driven since the GFC. At least
China's errors are visible. The world needed an orderly deleveraging. Instead
we get trade wars and nationalism.

~~~
duxup
>At least China's errors are visible.

I'm not sure I would describe it that way. There's a real lack of visibility
in China I think.

~~~
lambdasquirrel
Those ghost cities are pretty visible. When negative interest rates enable a
company like Color, and then Color goes away, there's little to show for it.

------
axus
This happened when China _stopped_ "manipulating their currency", am I
correct? And wasn't that a goal of the USA for a while?

~~~
sct202
China has usually been accused of devaluing their currency to make their
exports cheaper, this is still in line with that.

~~~
seanmcdirmid
The reality for the last few years has been that China has been manipulating
the RMB to make it stronger. This drop to 7 should have come in 2016 based on
market forces and everyone could see the pressure in CNH trade.

~~~
rdtwo
This China has been propping up their currency in reality. They chose to let
it float more and it instantly crashed. There it could go all the way to 8.4
ish if they let it fully free float.

~~~
seanmcdirmid
They float it but manipulate the price the way other countries do
(buying/spending forex, interest rates, etc...). I doubt they it would crash
all the way back down to 8 at this point (ah, to remember 1999 when it was
8.8), but it depends on how much money they’ve actually been printing to
support their bubbly real estate market.

~~~
perl4ever
Is it really possible to change the value of a currency without constantly
spending money on keeping it away from equilibrium? What I'm saying is, isn't
it like extending a spring, where it's always going to go back to its natural
state whenever you release it?

------
_iyig
Somewhat related question: does anyone know how many yuan there are? That is,
how many have been issued in total by China’s central bank(s)? Are such
figures even made public, or is it a matter of detective work and estimation,
perhaps funded by outside private investors?

Needless to say, the ability to issue more currency without anyone knowing
you’ve done so (to increase/maintain domestic spending without the unwanted
side-effects of inflation, for example) would be a very useful tool in any
trade war.

~~~
JumpCrisscross
> _does anyone know how many yuan there are?_

Money supply is always estimated. Modern monetary systems don't have a single
person with a monopoly on creating money. The central bank "prints" a lot
money, but so do private banks.

(Some systems have a tighter handle on money supply than others. But the
measure is always an estimate.)

~~~
comicjk
You are right that no one knows the exact money supply. But banks printing
money is a misconception. Private lenders "create" money by fostering trust -
I have $N in the bank, even they also loaned 90% * $N to other people.
Effectively the same money is counted many times. But they don't have the
right to print money the way a central bank does. They can only re-loan money
that was deposited by others ("inside money") whereas the central bank creates
money truly at will ("outside money").

~~~
JumpCrisscross
> _they don 't have the right to print money the way a central bank does_

Yes, they do. A dollar created by JPMorgan Chase out of a loan wires exactly
the same as a dollar created by the Federal Reserve out of purchasing a
Treasury. (They both look exactly the same in your bank account and withdraw
exactly the same as cash.)

Money supply is fascinatingly complex [1].

[1]
[https://en.wikipedia.org/wiki/Money_supply](https://en.wikipedia.org/wiki/Money_supply)

~~~
kgwgk
But when they have loaned out as much as they can, they will only be able to
loan more money if they get more deposits (or capital). [Edit: I failed to
mentions other sources of financing, including from central banks as lenders
of last resort. RobertoG is right.] They cannot create money at will as a
central bank can. [Edit: the point stands, the intervention of central banks
may be required to inject liquidity when the banks cannot create enough money
by themselves and cannot find anyone willing to lend money to them.]

~~~
ajross
No, because the dollar they created and wired away based on the 10 cents of
reserve they hold might be itself deposited. Or the 10 cents might be the
deposit of a bank-created dollar. It's a feedback system, it doesn't strictly
need a central bank to work.

~~~
kgwgk
I’m sorry, it seems I misread what you wrote. That doesn’t contradict what I
wrote.

Yes, if the money created is in the end kept in the system as a deposit it
enables new loans (but it is not necessarily so if the money goes to someone
that uses it to cancel a loan of their own, for example).

And due to the fractional reserve requirement the quantity of money cannot be
increased without limit by commercial banks. That’s just a mathematical
reality, notwithstanding the fact that it’s not usually a binding constraint.

~~~
ajross
Right, there's an asymptote that caps the maximum amount of money in a system
based on some initial M1 and a reserve fraction. But in practice that doesn't
get hit because not all money is lent, so per upthread I think it's perfectly
reasonable to say that "banks create money" in the abstract.

~~~
kgwgk
We agree. But note that this is in the context of the following exchange:

    
    
      >> they don't have the right to print money the way a central bank does.
      > Yes, they do.
    

Where the response ignores that that limit exists (may not be relevant in
practice but it is in theory: a commercial bank can only give the loans that
it can support with its existing reserves or those it may have access to,
while for a central bank sky is the limit).

------
eb0la
This might explain the sudden bitcoin spike today?

~~~
cjbprime
It might, but 7% isn't much of a spike -- that happens anyway once every week
or so.

------
cheaprentalyeti
The US and China are a lot alike and a lot different.

The US debases its currency, to pay for welfare and social services and to pay
Pakistan for the privilege of fighting its clients in Afghanistan.

China debases its currency but then uses the resulting funds to build
factories in Shenzhen and coal mines in Inner Mongolia.

~~~
ryacko
Debasing currency is a product of ensuring low interest rates by printing
money. The Federal Reserve and the Chinese Central Bank neither directly loans
money.

------
wtdata
I am wondering what does this mean (if anything) to the huge amount of US
public debt that China holds.

------
bwb
Does anyone know what happens if we label them a currency manipulator?

~~~
AnimalMuppet
I don't think this is just cause for labeling them. This, if anything, is them
manipulating _less_ than they used to.

That said, labeling them would be a political act, not necessarily one based
on objective evidence. In the current climate, it might happen.

And to answer your question: I at least do not know.

~~~
bwb
Gotcha, thanks!

I was reading some background, and someone mentioned an estimate of 10 per
dollar to be a really true free-floating variable...

------
HNisCurated
Bitcoin is up, gold at all time highs.

Who are the losers when a government prints money?

~~~
imtringued
The government that doesn't.

~~~
seanmcdirmid
That isn’t true. The Swiss are not hurting much atm, keeping ones currency
strong means imports are cheaper even if exports are more dear, which is
useful if you import a lot.

------
luxuryballs
is this why bitcoin is mooning?

