Why Is the Yuan Still Falling?

Two and half years ago the Chinese Yuan peaked in value against the US dollar and with fits and starts began to fall. The weakening Chinese economy and flight of capital from the land of managed capitalism are largely to blame but when will this stop? Why is the Yuan still falling after two and a half years? One of the short term casualties of the Brexit vote was the Yuan. The Wall Street Journal reports that the Yuan falls to the weakest point since 2010 against the greenback.

The Chinese yuan fell to its weakest level against the U.S. dollar since late 2010, after China’s central bank cut its daily-fix value for the currency by the biggest margin since a one-time devaluation in August 2015.

The sharp move in the yuan fixing was a reaction to volatility in currency markets following the U.K.’s Thursday decision to leave the European Union, and especially to a surge in the U.S. dollar Friday as haven currencies jumped.

The People’s Bank of China on Monday fixed the yuan at 6.6375 per U.S. dollar, 0.9% weaker than Friday’s fixing of 6.5776. That move in the fixing level was slightly less than the 1.1% devaluation last August. The currency is allowed to trade up or down 2% from the daily fix.

The USD rallied in response to the British voters’ decision to leave the EU. China needed to adjust its currency trading range to accommodate this shift in the market. China is trying to avoid a currency panic as traders expect the Yuan to continue to lose value. Why is that? To paraphrase Bill Clinton, It’s the debt, stupid.

It’s the Debt, Stupid!

China has found something to blame other than its own mismanagement for its economic difficulties. Chinese premier Li Keqiang points to Brexit turmoil according to the Economic Times.

Brexit vote has hit global financial markets and the world economy faced new uncertainties at a time when the recovery from 2008 financial crisis still falls short of expectations, Chinese Premier Li Keqiang said today.

But the fact of the matter is that China bet heavily on a robust economic recovery from the 2008 recession and took on a mountain of debt. That debt is now equal to its GDP and rising. Why is the Yuan still falling? Look at Chinese debt and at the dysfunctional system of Chinese government. The Financial Times looks China’s debt problem and the Three Stooges approach of Chinese officials.

When China’s stock market plunged more than 30 per cent over the summer last year, Chinese regulators lept into action. Unfortunately, the leaping in question was less a graceful, synchronized jump and more a Three Stooges physical comedy routine as the Chinese government scrambled to retain control of its equity markets. Regulator actions were uncoordinated, at times even contradictory.

This approach is being replicated now is dealing with China’s debt dilemma. Political advancement comes in China from not messing up. When the economy is likely to keep slowing down and the debt situation is likely to explode no one wants to be seen to have had anything to do with it. The Yuan will continue to fall so long as the world economy is in the doldrums and China takes a Three Stooges approach to dealing with its debt burden and economic malaise.