2012-05-16

Yuan collapse goes mainstream as Financial Times discovers the yuan can drop; exchange rate hyperinflation cometh?

Why China’s RMB exodus IS the story
Yet, with fewer dollars making their way into the system, and with some Chinese corporates even finding themselves short of dollars, the official PBoC yuan bid has not been enough to entice dollars into government coffers.

Without dollars to purchase, the yuan-liquidity tap is effectively turned off and the PBoC is forced to turn to alternative liquidity tools, such as the repo markets.

Instead of selling yuan-bills outright, the PBoC is forced to do the opposite, because there are now too many bills circulating through the market and not enough liquidity.

It’s one reason why Chinese repo rates have been so volatile of late (and also why they’ve been moving higher steadily since 2009, since the more bill supply there is out there, the higher the repo rate goes):
The weak yuan story has now gone mainstream, it is no longer the domain of Liu Junluo, Mish Shedlock and other contrarians. Think of the yuan's value 10 years ago, when everyone would agree it was undervalued. Since China has been expanding money and credit at a rapid pace, the yuan has been depreciating against the U.S. dollar all this time. It has moved higher because it's starting position was too low, but the real exchange rate has been racing to meet the market exchange rate.

Furthermore, as I've written here, it matters why China sells Treasuries. No doubt you've run across the "China sells Treasuries, U.S. dollar drops, U.S. interest rates soar" thesis. Now, China has a huge stockpile of Treasuries and is much larger than Thailand, but Thailand sold its dollars off and the result was currency collapse. The question is the relative strength of each currency market, do people want to hold dollars or yuan? If you've noticed the U.S. dollar and Treasury rates since 2008, you know that the dollar is catching a bid.

Taking it one step further, foreign central banks have been printing way faster than the Fed, especially China. Here is money printing since 2008, red line PBOC, green line Fed:

The FT Alphaville blog post talks about the internationalization strategy as one to draw in dollars, but:
What happens if instead of a dollar inflow you get a mass capital outflow from China, with as many Chinese as possible converting yuan-denominated assets into dollars, seeing the yuan fall in value versus the dollar due to what is now an over-valued position?
China has pent up dollar demand because it already allows anyone who wants to buy yuan to buy, but it restricts outflows. Only retail investors and some speculators lack exposure to the yuan, opening the yuan will lead to net yuan selling in the short-term.

In the late autumn there was a decline in the renminbi against the central bank mid-point fixings and we're seeing similar weakness again:


No comments:

Post a Comment