Yuan Losses Accelerate

Why is it that yuan losses accelerate at the start of 2016? Bloomberg Business writes about how the yuan drops the most since August 2015.

China’s yuan fell the most since August, hastening its decline in extended trading hours on speculation the authorities stopped supporting the currency late in the day.

While trading will carry on till 11:30 p.m. from Monday, the central bank will continue to use the 4:30 p.m. price as the closing level, it said last month. This is significant because the monetary authority’s new system of setting the yuan’s daily fixing uses the previous day’s close as one of the factors. Major Chinese banks, which tried to sell dollars during most of the day, significantly reduced their offerings after 4 p.m., according to two currency traders.

“The central bank’s tolerance for a weaker yuan is much higher now as it wants to make the currency more market-driven,” said Xia Le, a Hong Kong-based economist at Banco Bilbao Vizcaya Argentaria SA. “The longer trading hours will help narrow the gap between the yuan’s exchange rates in Shanghai and Hong Kong. That’s because the onshore rate will be available during the European session, so it’ll have a bigger influence on the offshore unit.”

The challenges for China are to control the currency as Yuan losses accelerate but to gradually move to a market driven currency and at the same time maintain control of a slowing economy.

How Fast and How Far Will the Yuan Fall?

The Asia Times refers to China’s delicate balancing act in managing the yuan decline. The yuan will need to fall a lot more in order for the currency to match a true market value. The speed at which this happens will largely depend on how fast those in charge let it drop.

The point it is, the Chinese government isn’t trying to deliberately devalue its currency, but rather the market is because it thinks the yuan is overvalued.

China is in the midst of a difficult balancing act between short-term growth and long-term stability as it shifts from an economy led by investment and exports to one driven by domestic and especially consumer demand.

While external events such as slowdown in global export demand, and a sell-off of emerging market currencies have lowered the first side of the equation, domestic demand remains anemic.

As yuan losses accelerate Forex traders will anticipate an increasingly weak currency until at some point the yuan will overshoot and then correct. The Chinese economy is the main driver in this situation. Again, the timing of the yuan’s fall will likely be controlled by Chinese authorities who will limit trading whenever it is ready to spin out of control.

Chinese Economy

The Chinese stock market had a tenuous connection to the Chinese economy and that is why it boomed and then went bust last year. Now, as prices begin to reflect that state of the economy and various companies, evidence of further slowing drove stocks down and caused Chinese markets to stop trading. In response markets in Europe and Asia fell. NBC News reports on how U.S. stocks respond to new evidence of the Chinese economic slowdown.

The U.S. declines followed a rout that saw China’s main index shed 6.9 percent of its value, forcing an emergency trading halt. European indexes fell between 2 and 4 percent.

The spark that lit the selloff was the Caixin/Markit index of Chinese manufacturing, which is based on a survey of factory purchasing managers. The closely watched gauge fell to 48.2 points in December from 48.6 the previous month, marking contraction for the 10th straight month. On Friday, an official manufacturing index also showed a persistent contraction in factory activity despite Beijing’s stimulus measures.

So long as the Chinese economy continues to slow down the Yuan will fall as well. It may well be a long road ahead for the Chinese government to convert into a more consumer driven economy which is the best path towards more stability.