Desperate times, desperate acts

A sharp fall in global trade is the most likely reason for China’s decision to devalue the Yuan — not aspirations for CNY to be considered a reserve currency.

There are clear signs that global trade is contracting. Shipbrokers Harper Petersen’s Harpex weekly index of charter rates for container vessels fell 9 percent in July and August is following a similar path. Reduced demand for container shipping reflects a sharp fall-off in international trade in manufactured goods.

Harpex Index

Tyler Durden from highlighted China’s falling exports last week (August 8):

Goldman breaks down the geographic slowdown:

  • Exports to the US contracted 1.3% yoy, down from the +12.0% yoy in June.
  • Exports to Japan fell 13.0% yoy in July, vs -6.0%yoy in June
  • Exports to the Euro area went down 12.3% yoy, vs -3.4% yoy in June.
  • Exports to ASEAN grew 1.4% yoy, vs +8.4% yoy in June
  • Exports to Hong Kong declined 14.9% yoy, vs -0.5% yoy in June.

Slower sequential export growth likely contributed to the slowdown in industrial production growth in July. Weaker export growth is likely putting more downward pressure on the currency, though whether the government will allow some modest depreciation to happen remains to be seen.

Durden presciently concludes:

As global trade continues to disintegrate, and as a desperate China finally joins the global currency war, it will have no choice but to devalue next.

Michael Leibowitz at also warns of the destabilizing effect carry trades may have on any adjustment:

The “one-off” adjustment has now become two…. this devaluation is likely not a one-time event but rather the beginning of an ongoing and persistent depreciation of the CNY versus the USD. The embedded USD short position within the [estimated $2Tn to $3Tn] carry trades will begin to result in losses and margin calls as the USD appreciates versus the CNY, thus forcing investors to liquidate some of their positions. These trades, which took years to amass, could unwind abruptly and exert an influence of historic magnitude on markets and economies.

Read more at 1997 Asian Currency Crisis Redux | Zerohedge.

Let the Global Race to the Bottom Begin | Foreign Policy

Patrick Chovanec writes:

On Aug. 11, the People’s Bank of China announced a decision to devalue China’s currency — the renminbi, or RMB — by 1.9 percent, by resetting the daily band within which it’s traded…..

The Chinese will try to argue they are just letting the market have its way. This is misleading: For years, the Chinese prevented the RMB from rising in value by buying nearly $4 trillion in foreign currency. The current market “equilibrium” is predicated on that massive distortion. The only way to get to a truly market-based RMB is to first unwind China’s past intervention by supporting the RMB and drawing down China’s foreign currency reserves. We shouldn’t want the RMB to float until that happens…..

Read more at Let the Global Race to the Bottom Begin | Foreign Policy.

EconoMonitor » China, Not Piketty, Explains ‘Confused Signals’ in U.S. Asset Prices

From Benn Steil & Dinah Walker:

As for bond prices, China’s central bank holds the key.After more than three years of steady appreciation, the RMB has declined over 3% this year – erasing the past year’s rise. Driven by the Chinese government’s desire to re-juice failing economic growth, RMB depreciation has naturally been accompanied by an increase in China’s foreign exchange reserves.China usually allocates about 40 percent of its foreign exchange reserves to Treasuries; so far this year, however, its official holdings of Treasuries have actually declined. What explains this? Given that China comes under pressure from the U.S. Treasury and Congress whenever it appears to be pushing down its currency, China is almost certainly disguising its Treasury purchases by holding them in Belgium.

Read more at EconoMonitor : EconoMonitor » China, Not Piketty, Explains ‘Confused Signals’ in U.S. Asset Prices.