About That Perceived Overnight Yuan “Control”

As I was watching the Asia morning commentary last evening (remember, Wed. night U.S. is Thursday morning Asia) much of it was based upon the idea that China was showing its resolve in controlling their currency. The ideas being professed bordered somewhere along the lines of “China is sending a signal that it too has a way to battle tariffs. And with this current fix point of just above $7 USD/CNH shows they are showing great restraint in its willingness to use it as a weapon.”

I am not of that opinion, actually, I believe they are desperate to keep appearing that they have control. Because should it suddenly “get away” from the control of the politburo? Most, if not all, of China’s ambitions to be the world’s global economic power – evaporate. Regardless of what Ray Dalio thinks to the contrary.

Here’s a sample of how I’ve been addressing the moves in the Yuan. Below is from nearly one year ago, to the day. To wit:

China’s main goal for world trade domination and influence hinges on making the Yuan the reserve currency of global affairs. It has worked diligently, at every turn possible, to do just that. Getting its currency to be included into the basket of currencies known as the SDR was of a paramount pursuit. And on October 1, 2016 it finally attained it.

Then, just one month later – the world of changed.

At first it appeared, again, for that moment, that China would be able to just sit back and allow the political infighting within the U.S., along with what appeared to be the globe’s reluctance for further faith (as well as use) in the $Dollar to play out its own demise. And then: tax reform passed, and interest rate hikes began in earnest, and QT became manifest, and more. And suddenly trade was not only on the table, but all prior trade deals were straight-armed right into the dust bin.

And what China had previously taken for granted over the past 18 months has been nearly completely eviscerated (currency wise) in all of about 90 days. Along with any and all counter measures in dealing with trade issues previously assumed.

Now those prior assumed effective countermeasures are being countered to a point of two, if not 10 to 1! i.e., immediate countermeasures to their counters. It’s now a very serious (as well as costly) game of tit-for-tat. Especially for China. The reasoning is simple:

They are now faced with using what may be the only (and last) effective retaliatory weapon for trade disputes in their arsenal, which is – a devaluing of their currency.

But the problem is this: If they do, it may be much like the “nuclear option” it’s always described to be. i.e., Holds great power, but may ensure it hurts the user just as much as on whom its used.

Should the Chinese authorities suddenly allow for a massive devaluation under the current global circumstances it’s very possible (if not probable) that it will wipe out, in its entirety, all the work and forbearance they have worked so diligently for these past two decades respectively. Meaning – say goodbye to the Yuan having any implied reserve status, for who knows how long.

In a communist controlled country, civil unrest will be met with far more brutality, if needed, via an administration that is now cemented into leader for life status. Should trade wars cause unrest within the populace, it will be unwanted, yet, China has shown not only does it have the tools to control unrest (just look to prior examples) but it’s also willing to use those tools as it sees fit.

Remember: Any resulting unrest from trade can also be blamed on outside forces through propaganda. i.e., It’s the U.S. causing all this pain!” et cetera, et cetera.

Yet, when it comes to its currency initiatives, along with its true long-range plans/goals of superseding any all prior? The propaganda story is not within China’s control.

A rout based in currency flight out of the Yuan and into the $Dollar, along with a global market rout that many may see as the causation being China’s lack of being able to control its currency is something, and I’ll wager just about the only thing, that is keeping the current politburo awake at night.

That’s a story China can not afford to take shape an any price, for if they lose any perceived stability in the Yuan at this juncture…

It may put all their fought for gains back, by decades, and many at that.

We’re now closing in on those levels that may decide it all, again, where all control is not only perceived as lost. But proven to be so.

Is the Yuan weakening via intent or loss of control?” Aug. 8, 2018

I believe any stabilization that has taken place in the Yuan since 2015’s out-of-the-blue Yuan moment, has been nothing more than trying to save “face value” for the Yuan since their inclusion into the SDR.

For as I’ve stated ad nauseum – that was the true, real, strategic prize in long term trade domination that needed to be solidified. 2015’s wake up “global monetary moment” almost squelched it.

But here’s an important quantifier: should any major market panic erupt, creating any real turmoil shortly after (“shortly” is a relative statement) the Yuan’s inclusion? It could create the conditions where any of the IMF’s hopeful emergency stabilization measures in a global rout appear suspect or, even look badly on the SDR – and – positive for the U.S. $dollar.

This is something China’s politburo has to avoid at all costs. Repeat – whatever the cost.

I believe they’ve already lost control, and any move now is only to spin the currency narrative favorably. For they’re not only losing the current trade war rather, they’ve already lost it.

Companies will not relocate back, nor will they stay after the politburo openly showed the world, once again, how communism does capitalism. i.e., It doesn’t, it only appear to show a friendly face to it.

Too many forget that “face” is a mask – and the mask is coming, if not already, off.

All my conjecture of course. But if you doubt my opinion, all I’ll say is: How’s Hong Kong doing these days?

Maybe Ray Dalio should do the same. I hear they’re reforming capitalism too – right back into communism.

Funny how that happens.

© 2019 Mark St.Cyr