Yuan increased by almost 1% against the dollar last night as overnight borrowing costs in Hong Kong rose to 96%, according to Reuters, surprising observers and sending bears for cover.
Around the same time, after surpassing gold parity and reaching an all-time high of nearly $1,300, bitcoin flash crashed in a sell off run to $990.
Although there is no confirmation of a direct intervention by the Chinese government itself, there were reports they may order their state-owned companies to sell their foreign reserves to halt Yuan’s 7% decline. Moreover, the Chinese government has instituted a number of strict capital controls measures, requiring identification and completion of detailed forms to convert yuan into foreign currency. These measures may now be starting to work as the currency becomes scarce offshore.
On the other hand, market analysts are betting on a decline of yuan this year to 7.15 from the current 6.8125, according to Bloomberg, as the Chinese economy is expected to slow down with a state approved think tank already suggesting a “one off devaluation.”
Such devaluation would be risky for China which finds itself in a constrained position as the Trump administration is expected to begin a series of difficult negotiations with the world’s second largest economy. The two sides have already made some opening moves, with Trump tweeting that the relationship between China and USA is a “totally one-sided trade.” The statement was in response to North Korea announcing that they are in the final stages of developing a nuclear weapon, which is probably China’s response to Trump re-opening the Taiwan question.
That may be just the beginning. Trump has stated he will label China as a currency manipulator, a move that would allow the US to impose tariffs with suggestions of as high as 45%. In turn, China may threaten to close its market to foreign companies or disrupt supply chains.
According to Trump’s “chessboard,” his aim is to negotiate a “fair and free” trade arrangement with China which began money printing during summer 2016, devaluing its currency to export its economic slowdown with some accusing the Chinese policy makers of engaging in mercantilism. To escape the falling value of their currency, Chinese citizens and individuals took their money elsewhere, causing a capital flight of $800 billion, leading to yuan’s further depreciation and the beginning of an accelerated bull run for bitcoin.
In response, the Chinese authorities instituted a number of capital control measures, but as soon as one loophole was closed, another opened, with authorities depleting their foreign reserves in an attempt to halt the fall of yuan by selling dollars and other currencies. Nearing a psychological threshold of $3 trillion in reserves, the government may have ordered its state-owned companies to sell their foreign reserves or its banks to limit offshore lending to halt yuan’s fall and thus limit the capital flight.
The yuan rate will now probably stabilize as China awaits the inauguration of Trump and the onset of one of the most difficult chess game in living memory.
In all this, bitcoin is very much a spectator, an interesting fact in itself as the currency now becomes a hedge and a signal, responding to global financial moves and events with its own dynamics. It’s price trajectory therefore mainly depends on the global market’s response to yesterday’s move by Chinese policy makers which appears to be a stabilization of price with potential continued downfall of yuan later in the year.
Images from Shutterstock. Chart from TradeBlock.