by winston » Fri Oct 14, 2016 7:47 am
CNY Direction & Consequences
China began allowing its currency to[b] strengthen in value back in 2005[/b], to begin making progress to a more fairly valued currency. But they made just the minimal concession to keep U.S. Congress at bay, warding off threats of a big 27% tariff.
Over the course of eight years, they allowed appreciation of about 3% per annum. It was only within the context, though, of a rapidly growing economy. Therefore, growth dwarfed the consessions made on currency.
Which means they continued to operate with a highly suppressed currency, maintaining unfair advantages on trade partners and trade competitors.
Manipulating a weak currency is what enabled China's rapid economic ascent in the world. And though they've talked big in recent years about transforming the economy, encouraging consumption and open markets, when times are tough, we should expect them to go back to their knitting--leaning on currency manipulation to fuel exports, to solve problems.
And that's what they've done, quietly, since 2013.
The problem: A return to these policies would mean very bad news for the global economy. It was China's currency manipulation that created the global credit bubble (China recycling our dollars into Treasurys, keeping rates low, fueling more borrowing, more consumption ... and the cycle continued). A continuation of that would lead to a cycle of booms and busts.
With that, today, the Chinese government set the yuan rate at the lowest level since 2010. They've been steadily weakening the yuan all month.
Here's a look at the chart (the falling line is the dollar weakening, the yuan strengthening, and vice versa)...
image
So you can see where China left the peg in 2005. And when the global economy was in the throes of crisis, they went back to it. And when the Chinese economy started to grind slower, they have since gone back to weakening the yuan.
Source: Forbes
It's all about "how much you made when you were right" & "how little you lost when you were wrong"
