Yuan falls to 11-year low
bloomberg.com
bloomberg.com
The big risk from my point of view is that currency weakness tends to spook international investment capital who is exposed to the local currency, triggering selloffs as capital flees, exacerbating the problem.
A few years ago China clamped down on how much cash a person could send/take out of China or exchange for foreign currency.
It impacted a number of Chinese companies with operations in the U.S., especially Chinese real estate developers like Greenland, and basically eviscerated the EB5 visa market. I had a number of clients cancel deals because they couldn't get their money out of China.
> --a lot of non-Chinese companies immediately backed off on Chinese investments (i.e., factories, etc.)
That meant foreign companies on Chinese investments, not Chinese companies on foreign investments, right?
Tech companies like Microsoft fully own their Chinese subsidiary.
Annoyingly, if you ask a representative of the Chinese government if such a rule exists (before you have sent money into China), they will tell you no such rule exists, or that the rule doesn't apply to foreign companies. They wait until the money is in China and you try to transfer it out of your bank account to let you know that your company is also subject to these rules.
Several US clients of mine found this out the hard way (a few years ago, before the trade war).
The most simplistic interpretation I have is China and the US are playing a game of financial chicken. US raises tariffs and China lowers its currency. At some point, based on China's slowing economy and debt load this could trigger a major global recession since China will no longer be able to prop up economies that have been relying on its cash to purchase imports (e.g. Australian resources). In fact, China probably has to do this anyway at some point in time to offload the accumulating bad debt.
If anyone can ELI5 for me I would appreciate it. My impression is that Trump is betting China may just be desperate enough to seem stable (from an economy and currency standpoint) and may actually be willing to concede to his trade war. The guy in video seems to be saying that China may just accept some currency devaluation (other rich countries have done it and survived) and use the opportunity to fix some bad debt in their economy. If they do so, and they may just do so, then they can choose a policy that minimizes impact to their internal economy. That would likely cause major problems for everyone else.
I'm having a hard time seeing a good conclusion to this mess if I'm understanding correctly.
China is actually keeping its currency from devaluating right now(trump is playing the media) If all controls are lifted the currency will plummet. Many friends in china have expressed their desire to get out a portion of their cash, and surely nobody is thinking about investing.
China has significantly more discipline than the current US administration and opposite to Trump's short-term shoot-from-the-hip approach, they are likely taking a page from Sun Tsu:
If your enemy is secure at all points, be prepared for him. If he is in superior strength, evade him. If your opponent is temperamental, seek to irritate him. Pretend to be weak, that he may grow arrogant. If he is taking his ease, give him no rest. If his forces are united, separate them. If sovereign and subject are in accord, put division between them. Attack him where he is unprepared, appear where you are not expected.
On May 2019 china had 1.11 trillion USD bonds. And at any point china may decide to sell it off - which will crash USD.
And discourage factory work to leave for other countries (Vietnam, Mexico, Taiwan, Thailand, etc).
This large trade surplus basically means China earns a lot of USD and it uses those US dollars to buy US T-Bonds.
So for T-Bonds the USD/Yaun exchange rate does not come into the picture.
But that low USD/Yaun exchange rate does help to keep Chinese exports cheap and that then helps to protect their trade surplus.
Everyone in Beijing or Shanghai owning a small condo with 70 lease is literally sitting on a property of nominal value of millions of US dollars. How can that value be justified? People are willing to take even 15% discount to get that assets out of the country.
All you have to do is take a look at their M3. PBOC is printing like no tomorrow, but cleverly puts a wall with they CNY-CNH shit.
Deep Throat says it should be 20 to 1 not 7 to 1.
The purpose of this is to serve as a tax on Chinese exporting companies. They get paid in USD, but they have to pay their suppliers and workers in Yuan. They are being robbed by their own government, because they are exchanging USD for Yuan at a disadvantageous rate.
I don't understand why people who don't live in China give two cares about their currency manipulation.
One thing you have to understand is, the exchange controls are for plebs, but the connected including the members of Politburo and State Owned firms (directly or indirectly), can happily get dollar in exchange of the funny money and buy REAL assets across the world. It can viewed benignly or nefariously based on what you think their end game.
But its effecting every one especially if you are in real-estate but also other things.
2. Most of these buyers are doing it while illegally avoiding capital controls - not with the blessing of the government. It's why Canada is such a popular destination for this money - it has no reporting requirements. The whole point behind China's exchange rate policy, is that it allows US dollars to enter the economy, but due to capital controls, not leave it (Without being subject to the 'tax' of unfavourable exchange rates.) Chinese nationals buying property in North America are not working with the policy. They were working against it
And yes, there's plenty of folks who do have a direct line to the politburo (Or, more likely, black market channels for exchanging money), and can turn their yuan into USD, without trouble, and then get that USD out of China. I don't think they are responsible for the majority of capital flight out of China.
A much better link would be something that talks about this close. For instance https://www.cbc.ca/news/business/chinese-yuan-falls-to-11-ye...
I'm still confused by the coverage, since it's trading at 7 CNY to 1 USD. That's still higher than the 52 week low. Also it's higher on the chart on the right which shows the 5 year closes. I'm very confused, since coverage doesn't jive with either chart.
So the Chinese need more Yuan to buy the same products/services from the US. And in contrast, Americans need less US dollars to buy the same products/services from China.
The article claims an exchange rate of 7.0391 CNY to 1 USD is an eleven year low, yet the 52 week range is 6.6704, and the five year low is below 6.2976. Typically, these charts show closes rather than intraday ranges, which further ads confusion about the claim.
You can quip about how sustainable this state of affairs is, but of the three, only federal debt is growing... And, if you look at inflation-adjusted metrics, that growth is very minor.
And the concern is that the Federal government has structurally degraded its budget such that it is running larger and larger deficits.
And unfortunately when you give away money as tax cuts it's often politically impossible to reverse it.
And if there are recession fears, the last thing you want to do is raise taxes. The problem is where the tax cuts are, not that they are tax cuts; you want to cut taxes on people who spend a high proportion of their income on consumption, not wealthy people who will sit on it.
As for the political impossibility of reversing tax cuts, in the case of cuts for the rich, this is not at all due to public pressure, but private pressure, and in that the impossibility of reversing tax cuts is no different from the impossibility of not enacting them. When politicians are more obligated to voters than donors, taxes on wealthy people will rise. There is zero pressure from voters to maintain tax cuts on wealthy people, other than general support for an entire package of tax cuts if very visible middle class subsidy is mixed in with them.
As for the idea that the latest tax reform only helped the wealthy:
"The analysis Doggett referenced indeed indicates benefits will accrue to the very wealthy over time. Yet in the first year of changes, the top 1 percent are projected to draw a little over half the tax savings. The threshold of 80 percent going to the top 1 percent is projected for the tenth year. Also, Doggett’s stated figure for incomes is too low; it ties to the first year of implementation."
https://www.politifact.com/texas/statements/2017/oct/20/lloy...
https://en.wiktionary.org/wiki/appropriate
"From Middle English appropriaten, borrowed from Latin appropriatus, past participle of approprio (“to make one's own”), from ad (“to”) + proprio (“to make one's own”), from proprius (“one's own, private”)."
So when you write, "when you give away money as tax cuts" it gives the impression that allowing people to keep more of their earnings is giving them things, it comes across as Orwellian. Legislation was passed, and signed into law. In the U.S., following the law is not giving people things, but income taxes are giving the federal government things (sometimes states too).
Isn't that what the federal govt does too? The US sells treasury bonds and China buys them.
https://www.investopedia.com/articles/investing/040115/reaso...
Mandatory spending items will at some point soon crowd out all other spending. This comes at a time when, over the last 4 or 5 years, foreign creditors have stopped financing our deficit by buying ever growing quantities of US treasuries. So, for the first time in decades, US domestic private sector will be tasked with financing their own spending.
It is about to matter very soon, as baby boomers retire en masse. The endless talk of government spending leading to inflation didn't manifest (except in asset prices) because foreigners recycled their surpluses into treasuries. That this has mostly stopped will change the dynamic. The Fed will need to monetize the debt (resume QE) because there is simply too much treasury issuance, and growing, to be funded by US domestic sector alone, either in taxes or buying bonds.
If you look up last couple years US debt issuance has been bought up mostly by private sector, while central banks are buying gold. Recipe for it being the bond bull market peak and that debt being paid back in nominal but lower real terms = inflation. The only way to retire the massive and growing federal debt. Call it MMT or whatever you want, but it's coming. The loser will be the $.
[0] https://nationalinterest.org/blog/buzz/2025-us-interest-paym...
Consists of:
1: Regulate the bond market to be very illiquid
2: Touch off deflation scare to herd the masses into USTs & sovereigns while CBs buy gold
3: Implement aggressive version of MMT
4: Watch bond bulls burn in real terms after you've lit their "Hotel California" on fire (MMT, monetize debt, devalue $)
MMT depends on recognizing when inflation runs hot and adjusting their methods. I doubt this will be as easy as they seem to assume. And moreover, they underestimate the effect on the currency. They do reference the carrying capacity of debt within the economy, but once that cat is out of the bag, faith in the $ will decline, and the political will to adjust spending and debt will not be there. But on balance, some form of this is probably inevitable. I just think $ and US Treasury holders won't be happy with the outcome.
These aren't my own ideas, I'll give a reference to financial analyst Luke Gromen (one of many) articulating this thesis [1] that I've come to agree with.
I think the only question is what is an actionable investment thesis. I say $ down, gold, Bitcoin up in 2, 5, 10 years. The rise in MMT as serious policy proposal is not an accident. It will give legitimacy to what would have been necessary anyways, and which was likely impossible politically to avoid given sluggish labor and wage growth after decades of equity bull run and growing inequality. Dollar is too strong, preventing domestic manufacturing from being viable and boosting capital surplus / trade deficit. Politically I think this has to change.
what would have been necessary anyway? I'm reading currency devaluation?
From the first page of the paper you cite.
To supply some evidence for the other side: Even Krugman considers MMT to be insane, and he's the economist who should be most favorable to it (since he's the most borrow-and-spend, deficits-don't-matter of any economist I am familiar with).
Baloney. Take a look at a graph of US federal deficit as a percentage of GDP. In 2018 the deficit was 3.8% of GDP, in 2019 it's expected to be 5.1%. If those were the values during a recession, that would be understandable, but during what is supposed to be a "great, amazing" economy, those structurally high values is what scares people.
However, you'll notice that the debt/gdp ratio has been stable for the past 5 years, or so.
BoJ is buying 90%+ of their own bond market.
Emerging markets are blowing up routinely, most recently Argentina.
Australia and Canada have their own issues.
The U.S. isn't perfect but it's comparatively safe with a large military and reserve currency status with positive interest rates giving them room to react short term.
(Edit: To be crystal clear, this relative safety on the world stage means the USD is in demand as a "flight to safety". Same can be said about Treasuries, which is why domestic economic analysis doesn't necessarily align with the recession indicator of an inverted yield curve. The world could be going into recession. It's also worth noting that Gold has been rallying in USD terms, which tells us it's even safer.)
In other words, the US could pay much less for debt if it wanted to.
https://tradingeconomics.com/bonds
No other developed country is paying anything near that amount. That is drawing a large inflow of capital into long-term treasuries, which in my view, is the true cause for the recent inversion.
The Fed should be attempting to smash the cost of US Government debt to the floor so the treasury can issue 50 year paper at 1.x% while there may be a window to do so.
It would be very unpopular with the wealthy and the private US financial system. I believe it's the sole reason they're not working aggressively to minimize what the US is paying for its debt vs other more risky nations. The Fed views the private financial system as a critical partner. To an extent by intentionally leaving borrowing costs higher than they have to be, they're performing a middle ground compromise with those partners vs the government's fiscal condition.
We have an “indepedent” central bank with a limited set of policy concerns which do not include this type of thing specifically so that “fiscal” concerns [0] like this are not factors in setting monetary policy.
[0] MMT correctly points out that the category is based on a fiction, but even MMT advocates (while they want Congress to consider monetary impacts of what has historically been considered fiscal policy instead of the fiscal myth) don't generally want the central bank doing the kinds of things that have been considered “fiscal”.
This is appealing to simple thinkers as it's true on the surface. America pays less ..great. It suits Trump's short term planning agenda naturally. But it fails to recognise a key point. Central banks interest rates aren't priced to coumtries 'the best rates', of borrowing. They are about controlling monetary policy.
Sure every country could drop interest rates to rock bottom. But what happens if inflation drops. Or a recession is looming? At a national level you need to look at higher interest rates as 'growth in the bank' for the future. And in the same way you should keep savings on hand, a govt should keep interest rate movement available for when times are worse.
Further, central bank rates effect consumer rates. Not everyone is eyeballs deep in debt looking for cheaper lending. We have to acknowledge savers too. There was a time not so long ago where people put money into banks expecting to make a reasonable profit. It feels like savers are a forgotten group. It's not suitable for everyone to load their savings into the market and hope timing suits their withdrawal needs.
This post-2008 era is going to be really interesting to study in another 20 years or so when it's played out.
In other words, this is 1997 as opposed to 2007-2008.
In actuality, if the US's reserve currency status went away it might be a good thing for our debt since the dollar value on forex would drop and exports would increase. It would also be easier for the US to inflate its way out of crisis in comparison to today.
https://www.theinvestorspodcast.com/blog/visualizing-the-sno...
(as I pointed out abive I agree that it would be good for exports)