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Yuan falls to 11-year low (bloomberg.com)
118 points by ccarpenterg 60 days ago | hide | past | web | favorite | 72 comments



Real Vision has some great commentary on the Yuan and its implications. Most recently: https://www.youtube.com/watch?v=1ssFICVFH40

The big risk from my point of view is that currency weakness tends to spook international investment capital who is exposed to the local currency, triggering selloffs as capital flees, exacerbating the problem.


It's worth noting that China's capital controls provide some insulation against this problem-- though they obviously cannot work to compel ongoing outside investment.


China's currency controls actually made the problem worse--a lot of non-Chinese companies immediately backed off on Chinese investments (i.e., factories, etc.) as soon as the controls were introduced.


What do you mean? China has had currency controls for a very very long time. It doesn’t affect foreigners or foreign companies so much, they give us an easy out (we can exchange whatever we earn automatically).


I'm referring specifically to the capital-related currency controls.

A few years ago China clamped down on how much cash a person could send/take out of China or exchange for foreign currency.

It impacted a number of Chinese companies with operations in the U.S., especially Chinese real estate developers like Greenland, and basically eviscerated the EB5 visa market. I had a number of clients cancel deals because they couldn't get their money out of China.


Yes, they clamped down on Chinese quotas, but not foreigner quotas. Your comment:

> --a lot of non-Chinese companies immediately backed off on Chinese investments (i.e., factories, etc.)

That meant foreign companies on Chinese investments, not Chinese companies on foreign investments, right?


The rule applies to Chinese companies and to the yuan-denominated financial accounts of foreign companies physically doing business in China (meaning having an office or facility in China), which is why it had a dampening effect on foreign investment.

Annoyingly, if you ask a representative of the Chinese government if such a rule exists (before you have sent money into China), they will tell you no such rule exists, or that the rule doesn't apply to foreign companies. They wait until the money is in China and you try to transfer it out of your bank account to let you know that your company is also subject to these rules.

Several US clients of mine found this out the hard way (a few years ago, before the trade war).


The requirements for doing forex are very different for both entities (and I know this from being a foreign entity with Chinese income and a Chinese bank account). There isn’t one rule, it’s a set of regulations.


Doesn't China require that a lot of ventures be majority owned by Chinese citizens? I could see that money ending up 'contaminated' and hard to pull back out of the country later.


Some JVs have a 51-49 rule, but these are mostly being liberalized. Basically, most foreign companies are underwater on their quotas so they can convert as much as they need to. All they have to show is that they either converted that much to RMB earlier or earned that much and paid taxes on it.

Tech companies like Microsoft fully own their Chinese subsidiary.



I"m having trouble really understanding what is going on in the linked conversation, I hate to admit it.

The most simplistic interpretation I have is China and the US are playing a game of financial chicken. US raises tariffs and China lowers its currency. At some point, based on China's slowing economy and debt load this could trigger a major global recession since China will no longer be able to prop up economies that have been relying on its cash to purchase imports (e.g. Australian resources). In fact, China probably has to do this anyway at some point in time to offload the accumulating bad debt.

If anyone can ELI5 for me I would appreciate it. My impression is that Trump is betting China may just be desperate enough to seem stable (from an economy and currency standpoint) and may actually be willing to concede to his trade war. The guy in video seems to be saying that China may just accept some currency devaluation (other rich countries have done it and survived) and use the opportunity to fix some bad debt in their economy. If they do so, and they may just do so, then they can choose a policy that minimizes impact to their internal economy. That would likely cause major problems for everyone else.

I'm having a hard time seeing a good conclusion to this mess if I'm understanding correctly.


The short answer is china doesn’t have a lot of options. It’s not clear what leverage they can find, I’m guessing they just don’t want to seem weak and give in. Trade is so unfair the US has practically nothing to lose.

China is actually keeping its currency from devaluating right now(trump is playing the media) If all controls are lifted the currency will plummet. Many friends in china have expressed their desire to get out a portion of their cash, and surely nobody is thinking about investing.


> I’m guessing they just don’t want to seem weak and give in.

China has significantly more discipline than the current US administration and opposite to Trump's short-term shoot-from-the-hip approach, they are likely taking a page from Sun Tsu:

If your enemy is secure at all points, be prepared for him. If he is in superior strength, evade him. If your opponent is temperamental, seek to irritate him. Pretend to be weak, that he may grow arrogant. If he is taking his ease, give him no rest. If his forces are united, separate them. If sovereign and subject are in accord, put division between them. Attack him where he is unprepared, appear where you are not expected.


It seems to me that China has been assuming Trump's been shooting-from-the-hip and short-sighted, and allowed themselves to be outmaneuvered by him. People call Trump incompetent and bumbling and other unflattering terms, but Trump is actually very smart and is playing with a full house from a deck he stacked himself.


I agree more with this type or reasoning. He or his administration knows full well that they are holding all the aces. So the Chinese can pretend to play tsun tzu all they want, US just needs to hold. Currently it’s looking much worse for china, but hey things can change and very very quickly.


China is creating controlled inflation - they are basically printing new yuans. That might seem like a bad idea, but China is using newly created currency to buy US treasury bonds (actually buying US debt). China is basically creating a huge leverage on US and on the same time it gives USA cheap debt to buy it's own products, and weak Yuan also causes their exports to be even cheaper.

On May 2019 china had 1.11 trillion USD bonds. And at any point china may decide to sell it off - which will crash USD.


So they sell treasuries and buy them with dollars. How does this crash the Dollar?


The Chinese are doing everything they can to make sure US tariffs don't affect US consumers.

And discourage factory work to leave for other countries (Vietnam, Mexico, Taiwan, Thailand, etc).


Doesn't the increase in cost of supplying the money that Americans need to buy Chinese goods (buying TBonds) just offsetting making goods cheaper?


For many years the value of the Chinese exports to the USA have been much greater than it's USA imports.

This large trade surplus basically means China earns a lot of USD and it uses those US dollars to buy US T-Bonds.

So for T-Bonds the USD/Yaun exchange rate does not come into the picture.

But that low USD/Yaun exchange rate does help to keep Chinese exports cheap and that then helps to protect their trade surplus.


Its win/win for the USA. Trump gets to push the Chinese around and American consumers get to keep buying cheap Chinese goods.


Is it easy for blue collar Chinese to leave and work in other countries?


I didn't read their comment as "preventing Chinese citizens from leaving to work in other countries" but rather "preventing factories in China from closing and moving to other countries". The workers wouldn't be going with the factories, the workers would just be unemployed.


I think the person meant the work, not the workers.


My uneducated guess is that Yuan is still over valued. Based on the personal anecdotes around me, I can see that the government is trying everything to tighten the capital outflow. That's not the case for the reverse direction though.

Everyone in Beijing or Shanghai owning a small condo with 70 lease is literally sitting on a property of nominal value of millions of US dollars. How can that value be justified? People are willing to take even 15% discount to get that assets out of the country.


The magic of Chinese two step. There is a glut of Yuan in China while there is a scarcity outside.

All you have to do is take a look at their M3. PBOC is printing like no tomorrow, but cleverly puts a wall with they CNY-CNH shit.

Deep Throat says it should be 20 to 1 not 7 to 1.


The purpose of this isn't to fuck with foreign economies, or to kill jobs in America, or any of that other nonesense.

The purpose of this is to serve as a tax on Chinese exporting companies. They get paid in USD, but they have to pay their suppliers and workers in Yuan. They are being robbed by their own government, because they are exchanging USD for Yuan at a disadvantageous rate.

I don't understand why people who don't live in China give two cares about their currency manipulation.


You are seeing the effects of this "manipulated" exchange rate in American real-estate in every metro-area.

One thing you have to understand is, the exchange controls are for plebs, but the connected including the members of Politburo and State Owned firms (directly or indirectly), can happily get dollar in exchange of the funny money and buy REAL assets across the world. It can viewed benignly or nefariously based on what you think their end game.

But its effecting every one especially if you are in real-estate but also other things.


1. Most people who are buying real estate on the coasts don't care about the exchange rate. They don't even care about the value of the assets they are buying. They are doing it because they are buying security, a backup plan, a diversified investment that can't be clawed back by their government, or exposed to the fortunes and misfortunes of China's economy.

2. Most of these buyers are doing it while illegally avoiding capital controls - not with the blessing of the government. It's why Canada is such a popular destination for this money - it has no reporting requirements. The whole point behind China's exchange rate policy, is that it allows US dollars to enter the economy, but due to capital controls, not leave it (Without being subject to the 'tax' of unfavourable exchange rates.) Chinese nationals buying property in North America are not working with the policy. They were working against it

And yes, there's plenty of folks who do have a direct line to the politburo (Or, more likely, black market channels for exchanging money), and can turn their yuan into USD, without trouble, and then get that USD out of China. I don't think they are responsible for the majority of capital flight out of China.


I don't understand this link. It's a trading quote, with no text and an irrelevant embedded video.

A much better link would be something that talks about this close. For instance https://www.cbc.ca/news/business/chinese-yuan-falls-to-11-ye...

I'm still confused by the coverage, since it's trading at 7 CNY to 1 USD. That's still higher than the 52 week low. Also it's higher on the chart on the right which shows the 5 year closes. I'm very confused, since coverage doesn't jive with either chart.


It's low in terms of the Yuan's purchase power vis a vis the US dollar.

So the Chinese need more Yuan to buy the same products/services from the US. And in contrast, Americans need less US dollars to buy the same products/services from China.


I understand how exchange rates work. What I’m confused about is claim that this is an eleven year low.

The article claims an exchange rate of 7.0391 CNY to 1 USD is an eleven year low, yet the 52 week range is 6.6704, and the five year low is below 6.2976. Typically, these charts show closes rather than intraday ranges, which further ads confusion about the claim.


Calling it lowest ever means that you can get more yuans than ever in 11 years for 1 dollar. If you look at the chart, it clearly shows that this is the maximum yuan amount you can get for 1 USD in at least 5 years.


Right. In other words, "the value of 1 yuan is the lowest in 11 years in terms of how many dollars it can buy..."


So perhaps the CCP is actually trying to keep American goods and services out of China while delivering Chinese goods and services to the US. Sort of a way of cementing their trade imbalance in defiance to Trump.


The US is running up a huge deficit and lowering rates yet the dollar is getting stronger. It is kind of strange.


The ECB is negative and preparing to cut lower.

BoJ is buying 90%+ of their own bond market.

Emerging markets are blowing up routinely, most recently Argentina.

Australia and Canada have their own issues.

The U.S. isn't perfect but it's comparatively safe with a large military and reserve currency status with positive interest rates giving them room to react short term.

(Edit: To be crystal clear, this relative safety on the world stage means the USD is in demand as a "flight to safety". Same can be said about Treasuries, which is why domestic economic analysis doesn't necessarily align with the recession indicator of an inverted yield curve. The world could be going into recession. It's also worth noting that Gold has been rallying in USD terms, which tells us it's even safer.)


The crazy thing is that the US is pricing its treasuries between Greece and Italy.

In other words, the US could pay much less for debt if it wanted to.

https://tradingeconomics.com/bonds

No other developed country is paying anything near that amount. That is drawing a large inflow of capital into long-term treasuries, which in my view, is the true cause for the recent inversion.


There's no question it's a bizarre choice given the epic funding requirements of the US Government now and for the foreseeable future ($12t in new debt minimum over the next ten years).

The Fed should be attempting to smash the cost of US Government debt to the floor so the treasury can issue 50 year paper at 1.x% while there may be a window to do so.

It would be very unpopular with the wealthy and the private US financial system. I believe it's the sole reason they're not working aggressively to minimize what the US is paying for its debt vs other more risky nations. The Fed views the private financial system as a critical partner. To an extent by intentionally leaving borrowing costs higher than they have to be, they're performing a middle ground compromise with those partners vs the government's fiscal condition.


The Fed explicitly does not involve itself in fiscal policy like this. This is a good part of the reason that people trust US currency.


> The Fed should be attempting to smash the cost of US Government debt to the floor

We have an “indepedent” central bank with a limited set of policy concerns which do not include this type of thing specifically so that “fiscal” concerns [0] like this are not factors in setting monetary policy.

[0] MMT correctly points out that the category is based on a fiction, but even MMT advocates (while they want Congress to consider monetary impacts of what has historically been considered fiscal policy instead of the fiscal myth) don't generally want the central bank doing the kinds of things that have been considered “fiscal”.


We need to consider this 'the US could pay much less for debt' line that is recently being pushed.

This is appealing to simple thinkers as it's true on the surface. America pays less ..great. It suits Trump's short term planning agenda naturally. But it fails to recognise a key point. Central banks interest rates aren't priced to coumtries 'the best rates', of borrowing. They are about controlling monetary policy.

Sure every country could drop interest rates to rock bottom. But what happens if inflation drops. Or a recession is looming? At a national level you need to look at higher interest rates as 'growth in the bank' for the future. And in the same way you should keep savings on hand, a govt should keep interest rate movement available for when times are worse.

Further, central bank rates effect consumer rates. Not everyone is eyeballs deep in debt looking for cheaper lending. We have to acknowledge savers too. There was a time not so long ago where people put money into banks expecting to make a reasonable profit. It feels like savers are a forgotten group. It's not suitable for everyone to load their savings into the market and hope timing suits their withdrawal needs.

This post-2008 era is going to be really interesting to study in another 20 years or so when it's played out.


Maybe they are afraid lower rates will inflate assets even more or cause another subprime bubble?


>To be crystal clear, this relative safety on the world stage means the USD is in demand as a "flight to safety". Same can be said about Treasuries, which is why domestic economic analysis doesn't necessarily align with the recession indicator of an inverted yield curve. The world could be going into recession. It's also worth noting that Gold has been rallying in USD terms, which tells us it's even safer.

In other words, this is 1997 as opposed to 2007-2008.



Cynically, this means the rest of the world is doing that much worse that the US, for all its issues, is seen as a safe haven for parking your money. Alternatively, there's more capital floating around than there are reasonably safe investment vehicles with better ROI than US treasuries.


I think the US continues to be buoyed by it's reserve currency status, if say oil started to be priced in euros the US might find itself with a currency like everyone else's and giant debts, the dollar would crash (which would be good for US exports)


The US gets a lot of flak for its high debt dollar amount, but realistically the more important metric is debt to GDP ratio, which is a decent indicator of a country's ability to sustain its debt. The US is somewhere around 105% currently, right around the same level as Belgium. For comparison, Japan is almost 250% - basically leveraged to its gills - but tends not to get the same level of bad press. The US should certainly be trying to lower that ratio, but we're still pretty far from Greece-level of crisis.

In actuality, if the US's reserve currency status went away it might be a good thing for our debt since the dollar value on forex would drop and exports would increase. It would also be easier for the US to inflate its way out of crisis in comparison to today.


While it's not Japan its debt to GDP is still really really high compared with the rest of the world

https://www.theinvestorspodcast.com/blog/visualizing-the-sno...

(as I pointed out abive I agree that it would be good for exports)


The dollar is, essentially, losing in an ugly contest. It has problems; everyone else seems to have worse ones.


The US government as a whole, if you combine Local, State, and Federal spending, is not running a huge deficit. It is, in fact, paying its debts down.

You can quip about how sustainable this state of affairs is, but of the three, only federal debt is growing... And, if you look at inflation-adjusted metrics, that growth is very minor.


> And, if you look at inflation-adjusted metrics, that growth is very minor.

Baloney. Take a look at a graph of US federal deficit as a percentage of GDP. In 2018 the deficit was 3.8% of GDP, in 2019 it's expected to be 5.1%. If those were the values during a recession, that would be understandable, but during what is supposed to be a "great, amazing" economy, those structurally high values is what scares people.


I'm not disagreeing that the US is going into too much debt in the current economic climate. The current administration is starving future ones of the tools that can be used to deal with a recession.

However, you'll notice that the debt/gdp ratio has been stable for the past 5 years, or so.


With near record low interest rates, after a decade long economic growth cycle, we are back to running $ trillion and growing deficits each year, at the peak of the cycle. In a few years, assuming current rates and no recession, interest on the debt will exceed military spending [0]. Imagine what happens when we do have a recession and much bigger deficits.

Mandatory spending items will at some point soon crowd out all other spending. This comes at a time when, over the last 4 or 5 years, foreign creditors have stopped financing our deficit by buying ever growing quantities of US treasuries. So, for the first time in decades, US domestic private sector will be tasked with financing their own spending.

It is about to matter very soon, as baby boomers retire en masse. The endless talk of government spending leading to inflation didn't manifest (except in asset prices) because foreigners recycled their surpluses into treasuries. That this has mostly stopped will change the dynamic. The Fed will need to monetize the debt (resume QE) because there is simply too much treasury issuance, and growing, to be funded by US domestic sector alone, either in taxes or buying bonds.

If you look up last couple years US debt issuance has been bought up mostly by private sector, while central banks are buying gold. Recipe for it being the bond bull market peak and that debt being paid back in nominal but lower real terms = inflation. The only way to retire the massive and growing federal debt. Call it MMT or whatever you want, but it's coming. The loser will be the $.

[0] https://nationalinterest.org/blog/buzz/2025-us-interest-paym...


MMT disagrees with the entire premise of your comment. The “why is this happening” podcast has an excellent explanation.


Perhaps it does. But since the majority of us here consider MMT to be insanity, your comment carries very little weight. (And some random podcast isn't very persuasive, either.)

To supply some evidence for the other side: Even Krugman considers MMT to be insane, and he's the economist who should be most favorable to it (since he's the most borrow-and-spend, deficits-don't-matter of any economist I am familiar with).


I know they do. The IMF does not. Read the playbook that the Fed / Treasury are likely running [0]

Consists of:

1: Regulate the bond market to be very illiquid

2: Touch off deflation scare to herd the masses into USTs & sovereigns while CBs buy gold

3: Implement aggressive version of MMT

4: Watch bond bulls burn in real terms after you've lit their "Hotel California" on fire (MMT, monetize debt, devalue $)

MMT depends on recognizing when inflation runs hot and adjusting their methods. I doubt this will be as easy as they seem to assume. And moreover, they underestimate the effect on the currency. They do reference the carrying capacity of debt within the economy, but once that cat is out of the bag, faith in the $ will decline, and the political will to adjust spending and debt will not be there. But on balance, some form of this is probably inevitable. I just think $ and US Treasury holders won't be happy with the outcome.

These aren't my own ideas, I'll give a reference to financial analyst Luke Gromen (one of many) articulating this thesis [1] that I've come to agree with.

I think the only question is what is an actionable investment thesis. I say $ down, gold, Bitcoin up in 2, 5, 10 years. The rise in MMT as serious policy proposal is not an accident. It will give legitimacy to what would have been necessary anyways, and which was likely impossible politically to avoid given sluggish labor and wage growth after decades of equity bull run and growing inequality. Dollar is too strong, preventing domestic manufacturing from being viable and boosting capital surplus / trade deficit. Politically I think this has to change.

[0] https://www.imf.org/external/pubs/ft/wp/2015/wp1507.pdf

[1] https://twitter.com/LukeGromen


> This Working Paper should not be reported as representing the views of the IMF. The views expressed in this Working Paper are those of the author(s) and do not necessarily represent those of the IMF or IMF policy.

From the first page of the paper you cite.


> It will give legitimacy to what would have been necessary anyways, and which was likely impossible politically to avoid given sluggish labor and wage growth after decades of equity bull run and growing inequality.

what would have been necessary anyway? I'm reading currency devaluation?


Yes.


When people refer to US government they mean Federal.

And the concern is that the Federal government has structurally degraded its budget such that it is running larger and larger deficits.

And unfortunately when you give away money as tax cuts it's often politically impossible to reverse it.


If one looks up the etymology of the word appropriate:

https://en.wiktionary.org/wiki/appropriate

"From Middle English appropriaten, borrowed from Latin appropriatus, past participle of approprio (“to make one's own”), from ad (“to”) + proprio (“to make one's own”), from proprius (“one's own, private”)."

So when you write, "when you give away money as tax cuts" it gives the impression that allowing people to keep more of their earnings is giving them things, it comes across as Orwellian. Legislation was passed, and signed into law. In the U.S., following the law is not giving people things, but income taxes are giving the federal government things (sometimes states too).


It's the balance of payments that's the problem, not government deficits. All lowering the deficit does when there's a negative balance of payments is increase private debt.

And if there are recession fears, the last thing you want to do is raise taxes. The problem is where the tax cuts are, not that they are tax cuts; you want to cut taxes on people who spend a high proportion of their income on consumption, not wealthy people who will sit on it.

As for the political impossibility of reversing tax cuts, in the case of cuts for the rich, this is not at all due to public pressure, but private pressure, and in that the impossibility of reversing tax cuts is no different from the impossibility of not enacting them. When politicians are more obligated to voters than donors, taxes on wealthy people will rise. There is zero pressure from voters to maintain tax cuts on wealthy people, other than general support for an entire package of tax cuts if very visible middle class subsidy is mixed in with them.


In the U.S., the bottom 47% pays zero income taxes. The tax rates on the middle class are far lower than in Europe. Look at the actual tax brackets (i.e. the data).

As for the idea that the latest tax reform only helped the wealthy:

"The analysis Doggett referenced indeed indicates benefits will accrue to the very wealthy over time. Yet in the first year of changes, the top 1 percent are projected to draw a little over half the tax savings. The threshold of 80 percent going to the top 1 percent is projected for the tenth year. Also, Doggett’s stated figure for incomes is too low; it ties to the first year of implementation."

https://www.politifact.com/texas/statements/2017/oct/20/lloy...


And unfortunately anytime politicians run on raising taxes it’s spun as a tax on the majority of people, whether true or not. But I disagree with using taxes to fund government. Money comes from the government as does the ownership of all property. Taxes should instead be used to disincentive bad behavior.


That's interesting, where can I see a chart of that?


Local and State in the US can't run deficits. They can put out bonds to fund projects but thats it. Its only the US federal government that can run deficits.


>> They can put out bonds

Isn't that what the federal govt does too? The US sells treasury bonds and China buys them.

https://www.investopedia.com/articles/investing/040115/reaso...


Yeah the fundamental difference is that states can't print money to pay them the way the federal government can.


The majority of US debt is special bonds owned by the Social Security Trust Fund. Only about 30% of bonds are owned by foreign entities. And the top foreign holder fluctuates between China and Japan.


GBP: "hold my pint"




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