So Much For One-Off Devaluation; 37 Yuan of M2 for Every Dollar of Reserves

Is China devaluing the yuan?

1. Since the yuan began appreciating and the institution of wider trading bands, the yuan is supposed to be market driven.
2. The PBOC did not allow the yuan to trade freely, stopping market attempted devaluations in late 2011 and 2012, and again in 2014 and 2015 by keeping the fixing unchanged.
3. On Tuesday, China's says it will do a one off devaluation, dropping CNY fix from 6.12 to 6.22
4. The market takes CNH down past 6.40
5. The PBOC drops the CNY fix to 6.33

Clearly, the PBOC decides when to set the fix and when to let the market decide.

Also, what is the correct price of the yuan?

1. When a currency peg is below the market value, it is inflationary
2. Maintain a peg long enough and it becomes the market value
3. China engaged in inflationary monetary policy throughout the period of the peg and in the controlled appreciation
4. Two decades of controlled devaluation results in real devaluation
5. China's yuan is extremely overvalued, possibly by 30-50%

This chart shows the money creation (M2) by the Fed versus the money creation by the PBOC. Remember that the U.S. dollar is supposedly depreciating versus the yuan during this time and yuan is pegged to the dollar. The title of the chart is a Chinese idiom which is "the man who flees 50 paces laughs at the man who flees 100 paces." Only in this case, it's the central bank who inflates the money supply 200% laughing at the central bank that inflates 50%.

Every dollar in China's reserves is spoken for by 37.5 yuan in M2. Devaluation began around 2011, right when the market started trying to take the yuan lower and surprise, surprise, right when emerging market currencies started to decline in value. CEW lost 21 percent from 2011 to today.

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