People’s Bank of China Freaks Out, Devalues Yuan by Record Amount, Vows to “Severely Punish” Capital Flight

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Everything has started to go wrong in the Chinese economy despite its mind-bending growth rate of 7%. Exports plunged and imports too. Sales in the world’s largest auto market suddenly are shrinking just when overcapacity is ballooning. The property market is quaking. Electricity consumption, producer prices, and other indicators are deteriorating. Capital is fleeing. The hard landing is getting rougher by the day. But Tuesday morning, the People’s Bank of China pulled the ripcord.

In a big way.

It lowered the yuan’s daily reference rate by a record 1.9%. The yuan plunged instantly, and after a brief bounce, continued to plunge. Now, as I’m writing this, it is trading in Shanghai at 6.322 to the dollar, down 1.8% from before the announcement. A record one-day drop.

The PBOC had kept the yuan stable against the dollar. As the dollar has risen against other major currencies, the yuan followed in lockstep. Over the past week, the Yuan’s closing levels in Shanghai were limited to vacillating between 6.2096 and 6.2097 against the dollar. Over the past month, daily moves were limited to a maximum 0.01%. The PBOC controls its currency with an iron fist.

Hence the shock to the currency war system.

The Nikkei, beneficiary of the most aggressive currency warrior out there, had been up, nearly kissing the magic 21,000 at the open for the first time in a generation, but plunged 200 points in one fell swoop when the news hit. Then the Bank of Japan jumped in with its endless supply of freshly printed yen, furiously buying Japanese ETFs to stem the loss. The lunch break put a stop to all this. Then the Nikkei plunged again. Maybe the folks at the BOJ were late getting back to their trading stations. But now they’re back at work, mopping up ETFs.

“Currently, the international economic and financial conditions are very complex,” a PBOC spokesman explained. “Emerging market and commodities currencies are facing downward pressure, and we are seeing increasing volatilities in international capital flow. This complex situation is posing new challenges,” he said.

The yuan’s “relatively strong” exchange rate was “not entirely consistent with market expectation,” he said in perfect central-bank speak. “Therefore, it is a good time to improve quotation of the RMB central parity to make it more consistent with the needs of market development.” So he said, “Today’s central parity depreciated by about 200 bps. The market still needs some time to adapt.”

Meanwhile, the PBOC would “monitor the market condition closely, stabilizing the market expectation, and ensuring the improvement of the formation mechanism of the RMB central parity in an orderly manner.” Certainly, the market would not be allowed to do anything on its own.

And the devaluation is “a one-time correction,” he added, which everyone believed instantly.

Despite the iron grip the PBOC has on the yuan, it hasn’t abandoned the plan to turn it into one of the IMF’s reserve currencies and into a top trading currency to rival the dollar:

Next, the reform of RMB exchange rate formation mechanism will continue to be pushed forward with a market orientation. Market will play a bigger role in exchange rate determination to facilitate the balancing of international payments. Foreign exchange market development will be accelerated, and foreign exchange products will be enriched.

The PBOC will also “push forward the opening-up of the foreign exchange market, extending FX trading hours, introducing qualified foreign institutions, and promoting the formation of a single exchange rate in both on-shore and off-shore markets.”

And then he addressed the problem of capital flight, China’s foreign exchange reserves having plunged 16% from their peak in June last year. This “increasingly large and volatile cross-border capital flow,” as he called it, would have to be stopped, apparently.

So the PBOC and the State Administration of Foreign Exchange (with the somewhat ironic acronym SAFE) would “strengthen the examination of banks’ FX transactions according to relevant laws and regulations, adopt effective measures to fight money laundering, terrorist financing and tax evasion activities, and improve the monitoring of suspicious cross-border capital flow.”

Ah yes, and the PBOC and SAFE would “severely punish illegal FX transactions, including underground banks, and maintain a compliant and orderly capital flow.”

Not a lot of central banks would say that they’ll “severely punish” anyone, except savers. But you don’t kid around with the PBOC.

The PBOC’s freak-out came after all heck had already broken loose in China over the weekend. Read…. China’s Hard Landing Suddenly Gets a Lot Rougher

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  18 comments for “People’s Bank of China Freaks Out, Devalues Yuan by Record Amount, Vows to “Severely Punish” Capital Flight

  1. guido
    Aug 11, 2015 at 12:48 am

    Does this mean that purchases of properties here in US by Chinese will slow down? I know a few groups that have purchased homes here — a group purchases and they have a front man in Mainland and a realtor here. Won’t these people be one of those are responsible for the capital flight? It seems logical to wonder if they would be hurt by the devaluation.

    • Aug 11, 2015 at 8:45 am

      If the Chinese with money fear even more devaluations are coming, they might try even harder to get their money out beforehand, and that might speed up home purchases in the US. If devaluations continue and get larger, at some point, buying a home in the US might get too expensive….

      • David in Texas
        Aug 11, 2015 at 10:20 am

        I agree that the Chinese will try even harder to get their money out, and not just for reasons of devaluation. They know their country’s history – in fact, anyone over 40 has already lived through massive upheavals with very high body counts. Most are patriotic and are genuinely proud of their country’s achievements since Mao’s death; but they know that when things go bad in China, they can go very bad, very quickly. Better to make Plan B and get at least some assets out of the country, while they still can.

  2. VegasBob
    Aug 11, 2015 at 1:44 am

    In the memorable words of George W. Bush, “This sucker could go down.”

    Central bank insanity is now a worldwide phenomenon.

    When this sucker finally does blow up, it’s going to make the 1930s look like a period of prosperity.

  3. D
    Aug 11, 2015 at 4:48 am

    If the Yuan is still technically pared to the dollar, wouldn’t yuan devaluation signal dollar devaluation? Or

    • No
      Aug 11, 2015 at 10:43 am

      No, they revalued the peg to a lower ratio

  4. hoop
    Aug 11, 2015 at 7:07 am

    Funny, only 2 pct!!!! it looks like they are now openly suggesting chine’s to take their money out of the country or convert them into assets which the over leveraged banks are more than happy to sell them. cq offload to them.

    Its not a currency war between countries its WORLD WAR III and the enemy is the normal deposit holder or more correct the average man. All these central bankers meet each other in Basel. Their job is to keep their economies alive. Not so long ago after the crisis started in 2007/2008 i read somewhere that the g20 countries central banks agreed that all central banks can do what they deem necessary for their respective countries. So the currency war was known to be coming. Look who is served with this currency war. :) Who will come ahead out of this game. Ban…..

  5. Vespa P200E
    Aug 11, 2015 at 7:19 am

    As expected the long rumored China resorting to RMB devaluation to assist the exporters of finished goods and commodities of over-built industries like aluminum, solar panels, steel, cement, glass, etc. to be followed by dumping charges (WTO will be busy indeed). In the mean time USD is rising…

    Protectionist sentiment arises by many nations in order to protect its own industries AKA better paying likely union mfg jobs in resulting in tit for tat quotas and even embargoes leading to trade wars and competitive devaluations.

    Oh wait – isn’t this what happened before WW II?

    We learn history so as not to repeat it.

  6. hoop
    Aug 11, 2015 at 7:19 am

    The wo3 on the depositors have 2 positive effects. Money start to move and velocity goes up and consequently GDP. Even if the only activity was a shre transfer from the unlucky mass to the happy few. Also the money will flow into the big multinationals, ergo the share buy backs companies, ergo the s&p500 companies. So they will be able to pay at least the interest of all the new acquired debt to pay the happy few. And even make a new sharebuy back possible. So it doesn’t matter for a multinational if the FED or BOJ or PBOC does the act of ”’stimulating”’ the economy. Money start rolling again and the happy few can start to buy Louis Vuitton bags again.

  7. hoop
    Aug 11, 2015 at 10:04 am

    here is the article

    http://www.ft.com/cms/s/0/c6bf0b72-a1b8-11e1-a22e-00144feabdc0.html#axzz3iWCaNuaa

    here the text: (important: “recognizing” that each country might pursue different policy paths)

    G8 leaders on Saturday vowed to “strengthen and reinvigorate” their economies while pointedly “recognizing” that each country might pursue different policy paths in a statement that reflected the enduring split between proponents of greater stimulus or austerity.

  8. hoop
    Aug 11, 2015 at 10:12 am

    Aa: strengthen = code word for changes of laybor laws and fiscal laws.

    BB : Reinvigorate ??

    1.To give new life or energy to.
    2. to put vitality and vigour back into (someone or something)

    Funny the US economy is very often described as a drug patient in a fatal state who needs a new shot. (Credit/Debt)

    It looks like the central bankers very well understand the general mood.

  9. Shawn
    Aug 11, 2015 at 12:35 pm

    How does this affect the housing bubbles currently underway in LA and surrounding counties as well as the San Francisco bay area? How important is Chinese money to the California housing market?

  10. Dave Mac
    Aug 11, 2015 at 2:10 pm

    If Chinese money flows out looking for a safe haven then Japan is the nearest place for it to go to. Singapore is also a good option.

  11. Julian the Apostate
    Aug 11, 2015 at 5:35 pm

    Well, Andy Hoffman nailed this sucker. I think we’re looking at the endgame here Ladies and Gents…

  12. Nick Kelly
    Aug 11, 2015 at 8:41 pm

    Possibly this means that if MS.Yellen was looking for an excuse to delay raising rates this qualifies.
    I believe she said the decision would be ‘data dependent’
    Looks like data to me.

  13. Joe
    Aug 11, 2015 at 10:50 pm

    The Japanese Yen has fallen 50% in the last 2 years 6 months… and still falling

  14. Nick Kelly
    Aug 12, 2015 at 12:27 am

    What would you think of an executive order by the US president slapping a 4 % tariff on all imports from China? Just the amount of the devaluation-no more no less.

Comments are closed.