How freaked out can the People’s Bank of China be about the Chinese economy that has been growing admirably at 7% this year, according to the government?
OK, there are some quibblers who might point out that car sales in July have plunged 6.6% to a 17-month low, after having already shrunk in June, and after having trended down all year, in the largest auto market in the world with the largest auto manufacturing capacity in the world that had been growing in leaps and bounds and had pushed job creation, investment, and GDP to new heights.
US automakers have bet the farm on China. This is where growth would come from. But in July, Ford sales through its joint ventures dropped 6% year-over-year, the third monthly decline in a row, and GM’s sales through its joint ventures dropped 4%. A vicious price war has broken out. In a market that has gotten used to seeing double-digit growth!
And granted, exports and imports plunged too, and producer prices plunged, and the totally crucial property sector is wobbly, and manufacturing plants get shut down as overcapacity is running rampant, and all kinds of other things plunged or stagnated or wobbled, and now the PBOC is truly freaking out.
Tuesday morning it had devalued the yuan by lowering the daily reference rate by a record 1.9% against the dollar. The spokesman called it a “one-time correction.”
The yuan – after moving no more than 0.01% against the dollar in the prior weeks and trading in Shanghai between 6.2096 and 6.2097 against the dollar for days – instantly plunged, and ended the day at 6.3248.
It shook up the markets, pushed down metals, oil, other commodities, and emerging market currencies. The Nikkei plunged until the Bank of Japan’s muscled intervention put a floor under it. As part of its well-communicated QQE policies, the BOJ buys equity ETFs when stocks start dropping. Hedge funds expect it and start buying with the BOJ. It works like a charm. And then in the US, stocks swooned too.
That was Tuesday. It was a “one-time correction,” as the PBOC said, so the markets would adjust and get over it and move on to the next topic. Surely they’d find something to be enthusiastic about.
That theory fell apart Wednesday morning in China, just as everyone was getting ready to settle in, when the PBOC devalued the yuan again, this time by 1.6%, the second biggest cut in two decades after yesterday’s record. As I’m writing this, the yuan is down to 6.437 against the dollar in Shanghai trading.
That’s a 3.4% devaluation in two days!
In offshore yuan trading, mayhem broke out: On Tuesday, the yuan plunged 2.8%, and on Wednesday morning, it dropped another 2.2%. That’s 5% in just two days!
A real devaluation. A broadside in the currency war. And given yesterday’s willfully false promise that it would be a “one-time correction,” more devaluations are now likely, regardless of what the PBOC might say, and in particular if it denies it.
Clearly, the Chinese government has decided to solve China’s economic problems via its currency. To heck with the rest of the world. This is exactly what the Fed, the Bank of England, the BOJ, and the ECB have done. Now it’s the PBOC’s turn.
And markets are having conniptions. Copper just dropped 1.8% in one breath to a new multiyear low of $2.294 per pound. Oil, which was up in the hours ahead of the announcement, dropped too, with WTI plunging nearly $1 after the announcement to a multi-year low of $42.89 a barrel.
The Nikkei plunged over 402 points as I’m writing this, or over 2%, to 20,319. Even the BOJ’s frantic buying has trouble stopping the cascade. Chinese stocks are under iron-fisted government control, and there isn’t much movement. But Hong Kong’s Hang Seng is down 500 points so far, or 2%. Singapore is down 2.6%.
These devaluations, the past two and the future ones, raise all kinds of questions and concerns: Would Apple products suddenly face even stiffer price competition in China, either cutting into its profits or its sales or both? We don’t have a crystal ball either, but we suspect what the answer might be. American tech products are going to have an even rougher time in China.
And what about the Chinese with money? What will they do? Sit there and watch their wealth get frittered away by PBOC’s currency war, like the Japanese and the Europeans are watching their wealth get frittered away? Unlikely. There may well be a tsunami of money from China into housing and other assets in trophy cities in the US, Canada, Australia, New Zealand, and other countries to further inflate, at least while the party lasts, the already breath-taking local housing bubbles.
But in its infinite wisdom, the PBOC already anticipated that; yesterday its spokesman said the PBOC and the State Administration of Foreign Exchange (SAFE) would examine the banks’ FX transactions, “adopt effective measures to fight money laundering, terrorist financing and tax evasion activities, and improve the monitoring of suspicious cross-border capital flow.” And they would “severely punish illegal FX transactions.”
So things are getting messy in China. The PBOC’s two-day 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