Another Call For Devaluation

WSJ: China’s Looming Currency Crisis
Alternate: China’s Looming Currency Crisis

By Anne Stevenson-Yang and Kevin Dougherty.

The argument isn't substantially different from the one I made here back in 2013. Either the currency weakens or deflation will tear through the Chinese economy.
Finally, if China decides it will pursue quantitative easing and flood the system with liquidity, it will have to create new money, a defacto devaluation of the yuan against its reserves. If the market responds to this change by demanding U.S. dollars, the defacto devaluation of the yuan will accelerate. China would have two choices: allow the yuan to depreciate and end the outflow of forex reserves, or try to hold the peg and hope that the storm passes before reserves suffer a critical loss and a currency collapse.

...If the Chinese economy experienced a major recession and currency devaluation, the U.S. dollar would be the main beneficiary globally, as devaluations spread across most emerging markets. This could be happening now with Brazil, India and Australia among the nations experiencing currency depreciation versus the U.S. dollar (and Chinese yuan). China's financial system is also showing signs of a crackup, with overnight interest rates hitting 13%.

Investors can use 2008 as a template. The U.S. dollar will rally strongly against most currencies. Commodity prices will continue to weaken.

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