China Moves to Devalue Yuan | Hacker News Reader

China Moves to Devalue Yuan

wsj.com

82 pointsethanhunt_62 comments

Some likely effects from this:

1) US consumers just got a small standard of living boost. The same things they were buying before, will now cost less. It'll have little to no effect on US domestic manufacturing.

2) This will put some downward pressure on US consumer prices. Giving the Fed even less inflation concern (at least from the CPI angle).

3) The Fed is very, very unlikely to raise interest rates in September. It's practically guaranteed not to happen. Investors are likely to bet on this today, and stocks will probably climb significantly over the next few months in response to the Fed not hiking. The bet will shift from expecting a hike, to not expecting one for the remainder of 2015.

4) This will add fuel to the currency wars. The Eurozone, Japan and others will probably respond. It'll also put pressure on emerging market competitors, from Brazil to Vietnam.

5) It's going to squeeze some Chinese companies carrying debt in other currencies (Bloomberg reports that Chinese companies have $529 billion in dollar and euro based bonds and loans outstanding).

6) The dramatic capital flight out of China over the course of 2015 ($300+ billion so far), will increase.

I've had this theory for a very long time that the massive number of extremely low paid workers in China is what enables the US's ZIRP and printing of money. You used to always read about the "bond vigilantes" who would drive interest rates up when too much currency was printed, but I can't even recall the last time I heard the phrase "bond vigilante" used in an article.

It's a common truism that governments can't (in the long term) set the price of money (eventually it will collapse as the market asserts reality upon the situation), but as I understand it, for quite some time now, the US Treasury is the bond market - as the largest buyer, they set the real interest rates, and the workers in China churning out cheap goods for $2/hr control the consumer price index inflation that would otherwise show up.

I've never thought this through at all though (and am probably not smart enough to), but have always wondered if there's some meat to this theory.

I keep hearing about the Fed raising interest rates, or not raising interest rates, but I'm unclear what the pros vs. cons are for the Fed to raise them at a given time. Would someone mind explaining that?

Why does China devaluing the Yen have any impact on US raising interest rates or not?

A looser monetary policy (lower interest rates) is thought to stimulate the economy (more jobs) at the risk of higher inflation. A tighter policy (higher interest rates) is thought to control inflation (stable prices) at the risk of a slower economy. They post a lot of information about it, for instance:

https://www.chicagofed.org/publications/speeches/our-dual-ma...

China is a large portion of the global economy, so things that happen there can end up having a big impact globally.

> The Fed is very, very unlikely to raise interest rates in September. It's practically guaranteed not to happen. Investors are likely to bet on this today, and stocks will probably climb significantly over the next few months in response to the Fed not hiking. The bet will shift from expecting a hike, to not expecting one for the remainder of 2015.

Why would the yuan devaluation affect the fed's decision?

The stock market opened after you wrote your comment, and u.s. index is down >1% and foreign index is down >2%.

The PRC has had a historical policy of linking the RMB to the dollar. That made sense when they were primarily reliant on exports to the US, but now that their exports are diversified and they have massive domestic demand, a float and inflation peg like we have in the US is a much more sensible policy.

The US dollar has an absurdly high valuation, so the sensible thing for the RMB (and most other currencies) is to devalue with respect to USD.

Tyler Cowen has a broader and more pessimistic view, my point is captured in his point 6: http://marginalrevolution.com/marginalrevolution/2015/08/six...

If you consider the dollar to have an absurdly high valuation, what do you think about the GBP and, until a year ago, the EUR?

Also CHF! Historically, the dollar isn't so high as other currencies are weak. The dollar is not overvalued by any measure.

I prefer ftalphaville's take: http://ftalphaville.ft.com/2015/08/11/2137067/this-one-time-...

There is a massive but officially not permitted capital outflow from China that's pushing up real estate markets around the Western world. To some extent we're paying for our imported manufactured goods from China by exporting house ownership and rent payments.

I think the Chinese billionaire effect might be real, but really the chief reason housing prices are so high is because we make it difficult to build housing. This is especially true in the most economically productive metro areas, such as New York and the Bay Area.

Even smaller cities such as DC are facing housing affordability crises. DC gained ~90K residents from 2005 to the present, but only gained ~12.5k new housing units in that time. If DC continues to grow, in the next 30 years DC will actually reach full buildout as allowed under current zoning and height restrictions. No additional units will be allowed.

Consider Toronto as a counter example. That city tore down parks to build condos. That didn't rein in prices. Now, the affluent foreigners have 3-4 condos to go along with that Maserati.

DC has torn down a lot of things to build housing, and has converted former industrial properties into new neighborhoods (NoMA is an example). DC itself can't get rid of many of its parks because the National Park Service controls many of them, but neighboring jurisdictions certainly have gotten rid of parks in exchange for high rises (Arlington, for instance).

What matters isn't what was replaced, but how many net new units are built vs. demand for new units. DC is falling behind. I'd imagine that Toronto has similarly fallen behind.

The obvious counter-argument is that home prices would have risen even faster without the construction boom.

In fact you could argue that if foreign investors have bought all your available housing then by building more housing you solve the problem of affordable housing and devalue the housing sold to others (but you got the income at the previous level).

Here in the UK we need a massive concerted national effort to replace both the sold housing stock and the demand from an increased population - not going to happen though as neither major party is looking to be responsible for a house price fall (however beneficial in a net sense that would be) as the newspapers/media will beat them over the head with it.

So we continue the wealth transfer from the poor/young to the rich/old.

It would help if most of DC wasn't limited by zoning to 3 stories. Even allowing the legal maximum of 10ish stories would help a lot.

>in the next 30 years DC will actually reach full buildout as allowed under current zoning and height restrictions

Where there is a will: https://youtu.be/gjHo5BZM7V0

I fully believe the capital outflow link to the rise in western real estate prices. As someone unlucky enough to be caught without any property, I am perplexed by the reasonable response. Friends have responded by taking insane loans (since property prices went up after said loans, these were really prudent financial decisions). I am at a loss. Will I be buying at the top? :(

Foreign investors buying up real-estate don't do it for the love of it. They seek returns by renting out.

And even though real-estate value has increased a lot. Rental income from these properties didn't increase at the same rate. Tenants can't afford to pay rent landlords would like to charge so there is downwards pressure on returns these properties can generate.

Not to mention, interest rates are at record low. What's going to happen when they go up? Not only demand for real-estate will be lower, there are borrowers who have accumulated too much debt to buy real-estate. They might be simply forced to sell as they wouldn't be able to service their loans anymore.

Nobody can predict the future but I'm not going to be surprised if we witness another real-estate crash in 2-3 years.

Lots of people suspect that the Chinese purchase of overseas property is mostly an expression of distrust at the Chinese government. Remember that China is still (very nominally) communist and not afraid to confiscate property of people who are sufficiently discredited. It happens occasionally in corruption crackdowns.

For this purpose, it's a minimum-risk store of wealth with a potential for appreciation and any actual returns are less of a priority. Something similar applies to Saudi and Russian oil wealth; an escape from the possibility of SHTF.

> Foreign investors buying up real-estate don't do it for the love of it. They seek returns by renting out.

Except often they don't, rental income is almost like a rounding error to them (it's not really, but they can't be bothered - the main thing, it seems, is buying the asset.)

I'm expecting a significant rise in the number of homes for sale when interest rates spike. Many multi-property landlords are relying on "hard money loans" or "bridge loans" to finance their properties. The nature of these loans is that they put the asset itself (i.e. the house) up as collateral, but also allow the landlord to leverage the loan into another one. So a landlord can put just a little bit of money down on a house, and then leverage it into a chain of multiple houses.

When interest rates spike, landlords lose leverage ability and may even have to refinance their loans. Spiking interest rates will lead to an influx of homes into the market as landlords who did not plan well enough for the spike are caught underwater in the same way as residential homeowners were in 2008.

Private equity firms are backing the loans, so maybe they'll just take the houses when interest rates spike, and rent them to tenants themselves. In the future, we'll all be renting from the Blackstone group!

Disclaimer: I am very uninformed on this subject and do not know what I'm talking about. :)

Careful here with the "prudent financial decisions" They took a risk and it paid off. It is only prudent if they were in a position to take the loss if the market had gone the other way. And I assume they still have their loan, so they are still at risk of losing the mean to pay it. Big risk, big reward/losses.

I talked to a guy that became property millionaire, if I had followed the exact same step he took, just with 2 years difference and a different city, I would have been in bankruptcy right now. You didn't/couldn't take a loan when they did - that boat has sailed. Buying today is a different market and you should approach it ignoring what you friends did in the past.

I won't give you market advise as I don't have a crystal ball. However, as a renter you are free to move around - that's your strength. Alternative to buying is therefore to move around and maximize your bang per rental buck. In most cities, there are areas where people would rather rent than buy and vice versa. Try to rent in the place where the rental yield is the minimum. Also, you have can look for better job opportunities that requires moving.

What's wrong with paying rent to someone in another country? There's the argument that the money doesn't come back into the local economy, but in this case it clearly does - they bought the house by paying a local seller.

Unless they bought it from a foreign investor.

There is something to be said for not having another country control property that one's citizens need to live. What if another country started buying up farmland, for example?

Beyond that they have no interest beyond financial to, say, keep things nice or affordable or to encourage sustainable growth or any of the other bonuses communities get when they have locals own property.

Citizens (and occasionally residents) have ultimate control over the land, through control of taxation and regulation.

Only if said Citizens are keeping their government in check.

Which is actually nice for the US, since Chinese buyers can't pick up a piece of real estate and bring it back home with them, and the ownership obligates them to pay taxes, etc.

It hurts the domestic home buyer, though, who has to compete with inflated all-cash offers from these foreign investors.

This:

> It hurts the domestic home buyer, though, who has to compete with inflated all-cash offers from these foreign investors.

is much more hurtful then the benefits provided by foreign buyers paying taxes. If you don't believe me, look at London. Actual workers are pushed out by money launderers (yes, that is what they are).

The big difference between the US and GB is how much more land there is in the US.

We can always build a new city.

Its not where the land is. Its where the jobs are. Is everyone going to live in a tiny house in BFE Texas?

This wouldn't be as much of an issue if more companies embraced working remotely.

Completely agree. It'll happen slowly. You already can see more companies willing to hire remote so you're not limited to candidates that fit your requirements within 0-50 miles of your office.

GB is less than 10% urban. A lot less. You could build another city the size of Birmingham in GB and not notice. The problem GB has with land isn't not having enough; it's a regulatory problem of planning permission and associated issues.

"the ownership obligates them to pay taxes"

In theory you're right, and they often do pay taxes, but there are many schemes where the foreign investors pay zero taxes. There's no incentive on the industry's part to showcase or investigate to what extent this occurs, but we know it's pretty prevalent.

Can you give examples?

NYC super wealthy pay less on property taxes: http://nypost.com/2015/03/09/new-yorks-super-wealthy-pay-les...

> To some extent we're paying for our imported manufactured goods from China by exporting house ownership and rent payments.

Warren Buffet warned us of this years ago (trade deficit causing real estate transfer between nations):

https://www.youtube.com/watch?v=M-vMxKvYfVs

I've asked this question many times to people deeply educated and versed in economics and never got a a good answer... In a world of currency pairing (ratios) A:B:C:D:E

Assuming parity among A:B:C:D, if each country prints 1 Trillion in their respective currency, what is the net effect aside from inflation 'potential'? 100:100, 1000:1000 .. It's still 1:1. Assuming there are deflationary forces countering the inflationary force of printing, nothing changes beyond maintenance of status quo.

The more and more I look at this picture, the more it appears to be global maintenance of status quo to, in the face of destabilizing systemic forces, keep things stable via countering forces (printing)

The only thing I can see suffering here are the variables outside of the clown show :

> Natural resources

> Environment

^ (Economic system becomes disentangled with underlying condition of resources/environment)

I guess this is where the eventual selling of 'global control' of these variable comes....

A system headed to centralized control.

> Assuming there are deflationary forces countering the inflationary force of printing, nothing changes beyond maintenance of status quo.

In the net, yes, but another way of looking at this is as a wealth transfer inside each country.

In the net, the pies remain the same size, but each individual slice is worth less and less.

The result is that as each government is playing the devaluation game to keep up, the organizations with early access to the newly printed trillions in respective currencies increase their relative percentage of the pie.

It's the status quo at the inter-country level, but it's a huge wealth transfer to the politically and financially connected at the local level.

China is devaluing yuan for quite a while, but usually more smoothly. Will this that do the trick or there is problem in fundamentals? Like debt is growing too fast comparing to rest of the economy.

Moreover, will China start making transition from cheap labour, efficiency based economy to innovation based one. Does government is aware of that challenge or they try to execute strategy for old model, that used to work, but may not help to make that transition?

> China is devaluing yen

Typo? If China's devaluing yen, could you link me to a source?

I assume he meant yuan.

As long as the government doesn't allow unobstructed access to foreign websites that aren't even remotely related to politics I don't see that transition any time soon. </rant>

I'm the last person to be an apologist for the Great Firewall, but how does it preclude the OP's point? The Chinese-language web and Chinese Internet users represent a pretty sizeable chuck, to the point that it's self-sustainable and innovation definitely occurs within this space. The Great Firewall just results in a walled garden; access to Facebook isn't going to magically spur innovation!

(Don't get me wrong: The Great Firewall is not a good thing, but I don't see it being wholly relevant here.)

First of all, that comment is mixed with a bit of rant. But seriously, the issue is so much more than mere access to Facebook. The connection to GitHub, Google Code, or anything via ssh or HTTPS in general is slow, flaky and frustrating. This poses a cost on acquiring latest news and technology, collaborating and deploying. AS for the walled garden, there's a Chinese saying of 闭门造车, which says if you build a cart with a closed door without any exchange of ideas, you can't make much progress. (Though that's not what the phrase originally meant, but the meaning when the phrase evolved)

>Moreover, will China start making transition from cheap labour, efficiency based economy to innovation based one.

This is my biggest skepticism towards China. They are simply not an aspirational brand. Who says "I buy Vietnamese so someday I can buy Chinese"? No, they say "I buy Chinese so someday I can buy European."

It doesn't matter how much of my dad's semiconductor research they steal (>10,000 hacking attempts from China EVERY DAY at an IVY LEAGUE INSTITUTION), China will never be sexy. That's why Titans like Renren and Weibo are huge in China while almost nobody outside the Middle Kingdom could give a damn. Name one luxury product that says "Made in China" without being accompanied by "Designed in California."

If the Chinese government let go of their iron grip of culture, maybe something remotely approaching cool will come out of China, but that's a can of worms they would rather keep shut.

It should be no surprise that even Hong Kongers are openly racist towards mainlanders: China has no brand.

Precisely the same thing was said about Japan. I know Japanese products don't have special cache now, but there was a time when the phrase "Jap crap" was in common circulation, and then a time afterwards where Sony took over the world.

It seems entirely plausible to me that China is working through the same historical process. Consider the possibilities of Foxcon- they already manufacture the most desirable consumer devices in the world.

I'm not entirely convinced. Japan didn't only invade America with electronics, it came with a widely appealing culture as well. Sushi, anime, jpop, all of these things made Japan more interesting than the gadgets it made.

Foxconn does indeed produce excellent electronics, but they're largely designed elsewhere. Most Chinese-designed consumer products lack appeal outside of China.

The reason I harp on about culture is because it drives fashion. The Chinese government is so adamant about dictating culture that it stamps out the possibility for subcultures to grow and, most crucially, become popular outside the country. Just look at China's film industry. Actually, don't. I've seen what passes for Chinese film media and it could have been written by a machine, or one of those folks from 1984 who release the same book every few years with different character names.

Dissent gives rise to new culture: American blacks playing blues becomes classic rock, which becomes punk rock, and so on. A government focused on dictating culture in an age of information is like going to high school and still being dressed by your mom.

Meanwhile, peripheral - and far poorer - countries are having cultural booms as their popularity spreads around the globe. Singapore, Vietnam, Thailand, heck, not to mention India, all have widely appealing cultural products. If China can't become cool, then they'll remain a factory, subject to the whims of global finance and technology.

There is a massive cultural difference between Japan and China, however.

Much of Japan's industrial transformation came after massive US post WWII investment.

(Note: same happened in Germany as well).

I wonder if they'll actually let it float this time. I thought when they previously devalued it to 6.20 a few years ago they claimed they'd float it but instead kept it statically pegged. Given macro-conditions, floating would probably make a lot more sense (if you agree with Tyler Cowen's perspective).

But politically, that would be relinquishing a degree of control, something they've been loath to do in general, especially in areas that are of strategic importance.

CNYEUR (euro per cny) exchange rate past 60 months:

       ++-------+------+-------+------+-------+------+--+
  0.15 +                                          **    +
       |                                           *    |
       |                                            *** |
       |                                        **      |
  0.14 +                                                +
       |                                                |
       |                                                |
       |                                        *       |
  0.13 +                                      **        +
       |                  *                   *         |
       |                 ***    * *                     |
       |             *      **   * *         *          |
       |                *     **    *** *   *           |
  0.12 +            * **       *     * **               +
       | *         *                     ***            |
       |   *                                            |
       |    **      *                                   |
  0.11 +  *   *  *                                      +
       |   *  * ***                                     |
       |       *                                        |
       ++-------+------+-------+------+-------+------+--+
        0      10     20      30     40      50     60

Against the euro, the CNY has appreciated by about 20% in the past 12 months, so any deval is as much about dollar strength (against which the CNY is semi-pegged). Europe has been devaluing through it's own QE and it buys about 20% of Chinese exports roughly. The same picture is more or less true of all the emerging markets that China exports to. Thus it's pretty much a rebalancing than anything else, and let's not forget it's only 2% (so far). Perhaps the most interesting chart is China's fiercest competitor, Japan. The yen is down more than 50% against the yuan in the past 2 years:

CNYJPY past 60 months:

     +-+------+-------+-------+------+-------+-------+--+
  20 +                                             * *  +
     |                                              * * |
     |                                         * **     |
     |                                          *       |
     |                                        *         |
  18 +                                       *          +
     |                                *                 |
     |                                      *           |
     |                               * **   *           |
  16 +                           *****   ***            +
     |                          *                       |
     |                         *                        |
     |                        *                         |
     |                        *                         |
  14 +                       *                          +
     |                                                  |
     |                *     *                           |
     |       *       * *   *                            |
     | ** ******  ***   ****                            |
  12 +   *      **  *                                   +
     +-+------+-------+-------+------+-------+-------+--+
     0     10      20      30     40      50      60

The JPY is down against pretty much everything else due to some of the most aggressive QE ever seen though.

What did you use to create these charts? I like them.

R package txtplot.

Cheers! I'm actually using R as part of a SaaS app I'm building at the moment. I'm gonna use this for an easter egg. :)

It's pretty useful if you're ssh-ing into a machine to run R and you just want a quick and basic idea of some data.

Nice ASCII.

But surely this is a function of USD vs other currencies, as CNY is mainly fixed against USD.

Absolutely. But with the current peg, where USD goes so the CNY goes. Given that only 20% of Chinese exports are to America, China is becoming uncompetitive on its trade-weighted basket and must adjust in the same direction as other currencies, that is, weaker vs USD.

It was expected, let's hope they don't slip much further.

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