Yuan is Rallying...but What's the Cost?

Mish Shedlock |

Bloomberg reports Yuan Set for Biggest Weekly Gain in a Year as PBOC Shows Support.

  • My first question was “So what?”
  • My second question was “At what cost?”

I will answer those questions with a chart momentarily, but first let’s consider a few snips from the article:

China’s yuan headed for the biggest weekly advance in a year with sentiment getting a boost from a central bank show of support and government steps to bolster economic growth.
The monetary authority strengthened the currency’s reference rate for the fourth week in a row, the longest run of increases since 2013, while Governor Zhou Xiaochuan said the nation’s balance of payments position is good, capital outflows are normal and there’s no basis for continuous yuan depreciation. An estimated $1 trillion of funds left China in 2015, about seven times that of the previous year, according to Bloomberg Intelligence.
“It’s not a good choice to short the yuan now, because the authority has sent a strong signal by letting Zhou make those comments, and it’s very difficult for any lender to fight against the Chinese central bank,” said Xia Le, a Hong Kong-based economist at Banco Bilbao Vizcaya Argentaria SA. “Sentiment has improved lately. But considering the capital outflows, the yuan will be pressured to weaken in the long run.”

Yuan in Pictures

Yuan Weekly

Time to Short?

Given the yuan is now probing the very area China devalued into, this would actually be a good risk/reward area from which to short. That is an observation, not a recommendation.

Regardless, I certainly agree with this statement “Considering the capital outflows, the yuan will be pressured to weaken in the long run.” To stem the tide capital outflows China has spent $1 trillion in reserves. The above chart shows what China got out of that: Not much.

Meanwhile, China rebalancing has gone into reverse: Nonperforming Loans Jump 51% from 2014 as Lending Hits Record High. The Bloomberg article suggests artificial growth via stimulus will be good for the yuan. I suggest otherwise.

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