Yuan Revaluation Hits a Wall

Andamento del mercato - 15/02/2016

In another blow to the ambitious efforts to restore export growth, Chinese policymakers are once again stuck between a rock and a hard place.  Despite persistent and painful struggles to keep the export market from faltering, the Central Planners have hit a policy wall as evidenced by slumping imports and exports.  Although the trade surplus released overnight climbed to a new dollar-denominated record, the headline figure should not be viewed as a resounding success of policy, but rather more evidence of its abject failure.  While exports have remained in freefall, the drop has been outpaced widely by imports which have slumped at an -18.80% annualized pace, generating the highest trade surplus ever for the leading Asian economy despite frail underlying fundamentals.  Efforts undertaken over the last 8-months to revalue the Yuan in light of the US dollar’s rapid ascension have been largely ineffective in rebuilding the export prowess.   Multiple advanced and emerging economies have taken unilateral steps towards competitive devaluation, but policymakers remain puzzled as to why these policies prove ineffective.

For policymakers rapidly running out of tools, competitive devaluation is viewed largely as a path to growth without having to implement any structural changes.  Unfortunately for policymakers, the global economy is not cooperating.  The absence of any substantive fiscal adjustments and stimulus has ensured that global trade will not rebound over the near-term.  Although the Chinese Central Bank is adjusting to new realities and rising capital outflows, its war on speculators has just begun as evidenced by the gradual increase in the offshore Yuan exchange rate.  Efforts to deter rising bets of a broader devaluation over the course of 2016 have seen the resurgence of jawboning and not-so veiled threats.  While fighting a Central Bank is not suggested in light of increased interventions, the People’s Bank of China does not have infinite capital to thwart speculators.  Just as the Swiss National Bank was forced to reevaluate its own intervention, China too will face its own day of reckoning.


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