Monday, August 24, 2015
What lies beneath the Yuan devaluation
Here is the link...
It was a week of explosions.
At around 11:30 pm on August 13, two consecutive explosions blasted warehouses containing hazardous chemical materials in Tianjin, a city located at a 30 minute train-ride from Beijing.
A day after the mishap, 50 people had already been confirmed dead (among them were 17 firefighters) and some 700 had been hospitalized. This is what the world came to know as a partial blackout was declared on the information coming from Tianjin.
Another explosion, with perhaps longer-term consequences, was the devaluation of the yuan for 3 consecutive days.
On Tuesday (August 11), the Central Bank of China lowered the rate of the Chinese currency by 1.87 %; then, the next day in another move, it was further devaluated by 1.6% and once again on Thursday. It was the first time since 2005, when the current mechanism of change was set up, that Beijing went for such brutal and unexpected moves.
More than 4% in 48 hours is a lot.
The South China Morning Post (SCMP) commented: “The Central Bank shocked the markets by devaluing the yuan by the most in a day in more than 20 years.”
The Hong Kong daily added: “With a dramatic devaluation of the yuan, Beijing brought out the bazookas in a move that might escalate a regional currency war that it had until now chosen to avoid.”
Why the bazookas?
This reminded me of the book Unrestricted Warfare, written in 2001 by two Senior PLA Colonels about the ‘Many Forms of Total War’. It says: “Terrorism may be the most transparent form of total war, but it is just one of the many forms of unconventional warfare. ‘Financial warfare’ in which a country is subjugated without a drop of blood being spilled, means entering and subverting banking and stock markets and manipulating the value of a targeted currency.”
Was the devaluation a guerilla tactic? Was it the beginning of a new war?
Experts are yet to agree on the meaning of Beijing’s sudden move.
Will it make China’ exports more competitive against its Asian rivals? Could this restore China’s competitiveness vis-à-vis other currencies such as the Japanese yen and the Korean won? It is not certain.
It is true that the Korean won reached its weakest level since June 2012 and the Taiwan dollar was also at its lowest since 2010.
The Indian rupee followed suit. But India’s Chief Economic Adviser, Arvind Subramanian affirmed that the impact of the devaluation of the yuan on the Indian rupee will only be ‘temporary’, given ‘adequate’ foreign exchange reserves; for him, “China is responding to its own internal development of slowing down of growth and exports in order to give its economy a boost. All of us policymakers around the world, including India, have to take notice of this action.”
Another explanation was that China had, for a few years, kept the rate of the yuan more or less fixed at 6.20 per US dollar, hoping to become a member of the exclusive club of reserve currencies of the International Monetary Fund (IMF). However, in a recent report, the IMF said that China’s immediate inclusion was not on the cards as the Fund would like to see China undertaking more in-depth reforms, by letting exchange rate fluctuate. Is it a first step in this direction? It might be.
Others have argued that the move to push the US dollar higher can only make imports more expensive for China, which is the largest user of energy, metals and grains. The devaluation could worsen the crash in the commodities market.
Interestingly, analysts also differ on what is going to happen next.
Reuters has another reading: “There are a bunch of reasons why China decided to devalue the yuan, ranging from falling exports to an ailing property market. The most worrying, though, is probably a destructive change happening in the country's labor market.”
Benjamin Robertson in the SMCP commented: “Regardless of other factors, Chinese firms with high non-yuan denominated debt holdings, and reliance on imported components, are now out. Chinese commodity producers, Chinese exporters, and Hong Kong companies with strong yuan cash flow, are in.”
Some time may be necessary to see the full implications of Beijing’s move.
The New York Times remains optimistic: “Here are two things that China’s government wants very badly: first, for its economy to remain on an even keel, keeping growth and employment high. Second, for its currency, the renminbi, to become globally pre-eminent, helping promote the country’s diplomatic goals and solidifying the country’s centrality to the global economy. Frequently those goals are in conflict. But on Tuesday, China did something it thought would advance both at once.”
And of course, there are the believers in China’s collapse, the “I told you soers”, for whom it is the beginning of the end. They believe that the Communist regime is trembling, that its end is coming fast.
To relax the atmosphere, after three days of explosions, the Central Bank of China affirmed that an adjustment to close the gap between the yuan’s mid-price and its actual trading rate was ‘basically completed’ and that the currency will now remain strong in the long run.
Instead of doing more predictions, it might be more interesting to look at the situation in the Middle Kingdom at the time of the ‘devaluation’.
It is ‘holiday times’ in Beijing and all the big bosses of China have moved to a more clement sky in the sea resort of Beidaihe in Hebei province.
Was a council of war held there? Apparently not.
On August 5, 2015, Xinhua published a news item titled, “Do Not Wait Anymore; No Meetings in Beidaihe.”
It explains that every year since Mao Zedong era: “current and retired Chinese Communist Party leaders met at the Beidaihe summer resort in July or August.”
The Official news agency is not shy to admit: “The annual Beidaihe retreat meeting is one of the CCP’s most mysterious meetings. Many major decisions or policies have been made there.”
Though it adds, “sources have speculated on the themes of the Beidaihe meeting this August and whether or not one will be held.”
Xinhua’s conclusion is clear: “Not long ago, the CCP Central Politburo met twice, on July 20 and on July 30, which was unusual. They have already discussed ‘The Thirteenth Five-Year Plan’, the CCP Fifth Plenary Session, economic strategies, the ‘anti-tiger campaign’, and other important issues.”
The article asks: "Is it meaningful, necessary, or possible to talk about these issues again in Beidaihe several days or ten days later?”
It probably means that the decision to devaluate was already taken before the ‘holidays’ started.
But the Communist leadership appears to be on a warpath for something else. On August 10, 2015, The People's Daily published an article sending a strong political message. It is titled: "Dialectically View the Phenomenon of Tea Turns Cold When People Are Away.” It might be far more serious than the devaluation.
The article explained: "People come and go; the present day replaces old times. Over the years, many of our Party cadres have correctly treated their status changes after having stepped down from their leadership positions. They consciously have not intervened in the work of the new leadership team, which demonstrates the open-mindedness and noble sentiments of a senior Party member and veteran cadre. They have thus won everyone's respect.” This targets former President Jiang Zemin.
It was insinuated that ‘a highly positioned cadre’, when he was in power, arranged for his trusted aides to be in the top positions for the purpose of being able to manipulate power in the future: “This phenomenon causes a dilemma for the new leader and puts him in an inconvenient position.”
The People's Daily compares the retired cadre as ‘cold tea’. This, of course, triggered many comments on the Net; one example: "If ginger tea [Jiang Zemin] insists on being as hot as before, what should we do? In such a case, we should pour it (the ginger tea) out!”
A full-fledged war seems on the cards between Xi Jinping and the ancient regime. Who will win is open to bets?
In the meantime, the ‘devaluation’ may stabilize.