Chinese Govt Willing To Take Yuan to Red Line in 2016

Reuters: Exclusive: China to tolerate weaker yuan, wary of trade partners' reaction - sources
China's central bank is willing to let the yuan fall to 6.8 per dollar in 2016 to support the economy, which would mean the currency matching last year's record decline of 4.5 percent, policy sources said.

The yuan is already trading at its lowest level in more than five years, so the central bank will aim to ensure a gradual decline for fear of triggering capital outflows and criticism from trading partners such as the United States, said government economists and advisers involved in regular policy discussions.

Presumptive U.S. Republican Presidential nominee Donald Trump already has China in his sights, saying on Wednesday he would label China a currency manipulator if elected in November.
China missed it's chance to devalue. The world would be better off today had the yuan declined in 2008 and underpinned a stronger recovery without the need for so much debt. China should have let the yuan devalue as soon as pressure showed up in 2011. Instead, it waited until the political mood overseas had shifted. The political window for depreciation closed; now China may face political repercussions for its currency policy. It is ironic that they escaped punishment when they were running a hard peg, and may be punished for the decisions of the free market (or maybe not if you believe in karma). Either way, the cost are rising, and when USDCNY goes through 6.80, the odds of markets taking over rises substantially.

As I wrote in early 2014 in The Logic of Strategy: Yuan Devaluation and the Road to Trade War
The protectionists are ever so slowly gaining the upper hand thanks in part to negative social mood. 2008-2009 will probably mark the peak moment for Wall Street and the Treasury Department, even though there is as yet no sign of it in Washington. Changes can be seen in the form of issues such as immigration, which has turned the grassroots of the conservative movement against the Chamber of Commerce and large corporations (due to an attack initiated by the latter against the former). This has pushed the Overton window of acceptable debate among conservatives who can now take shots at big business. There is also the growing libertarian faction pulled together by Ron Paul that supports his son, Rand Paul, that consistently attacks the Federal Reserve and Wall Street. Put it together and it is not hard to envision an anti-Wall Street, pro-manufacturing political consensus emerging. This will cut across party lines, with manufacturing unions pulling in Democratic support if there are specific bills to vote on.

...With a growing economic case against free trade, a shift in social mood making anti-free trade opinion more popular, plus the loss of political support for the financial sector, free trade will become a centerpiece issue in American politics. The trigger will be one of two factors. One is economic. China's credit bubble isn't going to slowly ride off into the sunset. There will be pain, it is only a matter of where it lands. The path of least resistance is devaluation of the yuan, something I have been looking for here for several years now due to the growth in credit. A target of ¥8 to $1 is a reasonable ballpark figure, with ¥10 to 1 not unbelievable given the rise of the shadow banking sector. The actual number isn't as important as the size of the devaluation: it will likely be large and set off the anti-China arguments that have been growing in the United States. The left and right have their beef with China's economic policies and the right has provided the main rhetorical cover for business. When that goes, there will be a bipartisan push for policies that counteract China's "predatory" currency policies. A Chinese devaluation could be the trigger.

The second factor is geopolitical. Do take the time to read the lengthy review linked above, and/or watch the video. Luttwak's main point is that China cannot simultaneously build up its economy and influence at the same time it builds up its military, and not run into resistance from surrounding states. He cites the Chinese policy on the island disputes as the case in point: instead of increasing China's power in the region, it has pushed Vietnam, the Philippines, Japan and Indonesia into the arms of the United States. An anti-China coalition is building up due to each nation following the logic of China's inevitable rise in power along with the perception of an increasingly aggressive China. China has "tipped its hand" so to speak and these nations are moving preemptively. Due to the nuclear arsenal of the United States and China (to say nothing of Russia's interest in the region), there isn't going to be a major war for survival. This reduces the options for confrontation, with one of the most powerful being economic. If there is a minor military confrontation that is too large to be ignored, the most politically acceptable response will be economic.

Either the economic or the geopolitical event can happen first then, but in time, the two will be seen as inseparable. Once events move in this direction, the logic to continue down the path is compelling.
It doesn't matter who wins the presidential election. Logic and the inevitability of market forces are carrying events forward now.

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