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Renminbi Rumbling
How Low Can It Go?

The People’s Bank of China hastily convened a rare press conference today to acknowledge that it was intervening in the market to prop up the sagging yuan, while at the same time still insisting that it will stick to its more market-based approach to determining the currency’s value on a day-to-day basis. The Financial Times:

On Thursday, Yi Gang, deputy PBoC governor, said the central bank would continue to step into the market to guide the currency to an appropriate level when it felt it was becoming “too volatile”.

“This kind of managed exchange rate system is appropriate for China’s national conditions,” Mr Yi said. “When market fluctuations are too big, we can carry out effective management to provide the market with more confidence towards the exchange rate system and ensure greater stability in the market and the functioning of the economy.”

The yuan was down more than 1 percent in early trading on Thursday, but recovered half its losses after the PBOC presser. The currency is currently down more than 3.3 percent since Monday’s big surprise. And the floor may not yet be in sight. Reuters was told by sources that “some powerful voices within government were pushing for the yuan to go still lower, suggesting pressure for an overall devaluation of almost 10 percent.” The Financial Times, meanwhile, speculated that authorities may have wanted a drop of only up to 5 percent, but having now opened up Pandora’s box by unleashing long-suppressed market forces, are looking at a drop as steep as 15 percent. The PBOC denied all such rumors.

As WRM wrote yesterday, the consequences of these kinds of currency movements could be profound:

The fact that leaders in Beijing determined that devaluation is necessary is more evidence that the economic troubles we’ve been seeing in China are more than a blip on the screen. […]

China is exporting deflation. Overproduction of key materials and goods in China—the Great Bubble of excess manufacturing capacity that powered much of China’s massive growth but is now a greater and greater burden—is forcing Beijing to reduce the price of its exports so that companies can sell more of their excess production at lower prices abroad.This is going to hit two important economic sectors and the countries who depend on them: there will be additional deflationary pressure on commodities worldwide, and there will also be deflation in the cost of manufactured goods. When China’s currency loses value against the dollar, everything at Walmart gets a little cheaper. That’s good for consumer standards of living, but bad for the firms competing to sell stuff that China makes.

If Beijing really is determined to pursue this kind of policy, it’s going to be a bumpy ride to the bottom.

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