Yuan 30% Overvalued Relative to Emerging Markets

ZH: Why Everyone Is So Nervous About What China Does Next, In One Chart
What happens next? Clearly more devaluation, or else China would not have pursued this step, especially since the paltry 4% deval in one week will hardly move the needle on Chinese exports, which is the real reason why China did this move (weeks after it boosted its official gold holdings by 57%). Goldman also admits as much: "It is hard to have a high degree of conviction in anticipating the increasingly fitful reactions of the Chinese policymakers, and by extension the near-term direction of the CNY. But on a longer horizon, the risks are tilted towards further CNY weakness."
Emerging market currencies and equity markets have been under pressure since 2011. China's M2 growth outstripped reserves over this period because China did not allow the yuan to depreciate along with emerging market currencies, and reserve growth slowed and then turned negative. The policy mix equilibrium in effect in recent years cannot be sustained any longer. Disequilibrium has begun as the market searches for a new equilibrium.

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