2015-07-29

Currency Devaluation Coming

Bloomberg: China to Allow Wider Yuan Trading Range, State Council Says
China will allow the yuan to trade in a wider range against the dollar, the State Council said, without giving a timing or scope for the potential adjustment.

Flexibility will be increased, the cabinet said in a statement Friday that focuses on supporting the nation’s trade after an index of factory activity fell to a 15-month low. The exchange rate will be kept at a basically stable level, the State Council said. The yuan traded in Hong Kong fell the most in almost three weeks on Friday, and its one-month implied volatility surged to the highest since July 14.

The onshore yuan in Shanghai, where moves are limited to 2 percent on either side of a daily fixing, weakened the least in emerging markets this year as the People’s Bank of China seeks global reserve-currency status at an IMF review in November. While a wider trading range would allow market forces a bigger role, it could provide room for depreciation and help exports.
Offshore yuan can trade freely. Chinese exporters can withhold U.S. dollars and exchange them for yuan in Hong Kong, or simply sit on them if they expect yuan devaluation. Where possible, Chinese could also find ways to take U.S. dollars out of China and exchange them for yuan in Hong Kong at the higher rate. With the capital account opening further for an SDR push, if traders want to take CNH lower, they can trigger U.S. dollar outflows from China. Imagine the Chinese herd, which poured into gold in 2011 and into stocks in 2015, pouring into U.S. dollars.

CNBC: A flexible yuan: The last thing China needs?
Ordinarily, wider trading bands are theoretically neutral on a currency. But in China's case, history reveals that wider bands do lead to a weaker currency, Mizuho explained. It pointed to 2012 and 2014, when the central bank last widened the trading band that sparked broad depreciation; 2014 for example saw the currency end the year with a more than 2 percent loss.

In regard to timing, Citi expects the band widening to happen after November, but warns it may be fast-tracked if the dollar spikes following a September U.S. interest rate hike.

The market isn't pricing in any trouble.

Reuters: Buy-and-hold investors help bond duo defy China volatility
China Merchants Holdings International attracted orders of $2.3 billion for $700 million of bonds with maturities of five and 10 years, while South Korea's Shinhan Bank made its debut in the offshore renminbi market with a 4.2 percent 1.2 billion renminbi three-year print.

Both were oversubscribed and are now trading above par.

...G3 and high-yield bankers said there were a number of deals in the pipeline, but until there was a semblance of stability out of China it would make deals difficult. At the same time, however, issuers looking to raise funds before the traditional summer lull may be running out of time.

WSJ: China’s Easing Makes It Cheaper to Raise Cash at Home
Beijing is hoping to further develop its local bond market in coming months, with an aim to allowing greater foreign participation. Such a development, coupled with lower onshore interest rates and tighter monetary policy in the U.S., could eventually lure more Chinese companies to issue bonds at home, said Standard Chartered’s Ms Liu. But it will take time.

“The U.S. dollar bond market is much deeper and issuers can raise more debt with longer duration,” she added.

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