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Chinese Officials’ playing magic tricks
The recent leadership changes at the People’s Bank of China (PBOC), indicate that there is something bigger going on than just a change of leadership. China is showing signs of distress and urgency, particularly related to the currency meltdown, which could have global market implications. Meanwhile, the mainstream narrative and financial media coverage are overlooking this bigger picture and focusing on the new PBOC head as a “continuity candidate”, dismissing the abruptness of the leadership change, which shows there are more short-term concerns to address. The term “continuity” is being used by the media accompanied by a flawed retirement age argument without considering the actual changes taking place.
The tighter grip of the Party over PBOC
According to Chinese media, Pan Gongsheng, a relatively young and experienced figure, is set to take over as the party chief while Yi Gang remains the governor. This move suggests a potential consolidation of power, with the party chief also serving as the governor. The mention of continuity in lending practices rather than massive monetary stimulus signal a greater party control over state organs, including the PBOC with implications for economic policy because China already has high debt levels, and that massive stimulus may not be feasible yet.
Who is Pan?
Yi Gang, who has been the PBOC governor since 2018, will be exiting his post. Pan Gongsheng, who has been the Deputy Governor of the PBOC and the Head of the State Administration of Foreign Exchange (SAFE), is expected to take over as the governor of the PBOC. Pan has previous experience in international markets and a role in managing China’s currency and implementing capital controls. He also was involved in regulating fintech and crypto and has a background in banking and bringing state-owned banks to IPO. Overall, Pan is seen as a market-oriented official who understands international markets.
Pan’s negative comments about Bitcoin and the crackdown on big tech companies indicate his aggressive style and alignment with the party’s interests. Despite being dropped from the Central Committee membership, Pan and two other officials were reappointed to their roles, suggesting that their positions were not seen as temporary. The media coverage at the time of Pan’s reappointment did not indicate that it was a temporary replacement, further highlighting his significant role within the PBOC.
Chinese Officials’ Struggle to Impress Market
The real reason for the change in PBOC leadership change may be related to the worsening economic situation and the need to address the depreciating currency. The yuan’s decline perfectly aligns with the timing of the party congress in October 2022 and the national people’s congress in March 2023, which led to reappointments at the PBOC. However, the yuan’s continued decline since then may indicate further instability and the need for policymakers to intervene.
In addition to that, the petro-yuan deal with KSA and BRICS headlines also did not do so much to stop the Yuan’s depreciation. Since then, measures have been taken by the People’s Bank of China (PBOC) to defend the yuan’s decline. The first line of defense is the PBOC’s daily yuan fixing rates, which are set every morning based on a black box formula influenced by the previous day’s closing price. The PBOC also surveys market players and sets the fixing rate above or below consensus expectations to signal their desire for a stronger or weaker yuan. However, these measures have been ineffective in preventing the yuan’s decline. As a result, China has been directing state banks to sell dollars and buy yuan, conducting surveys more frequently, and considering additional measures such as a circuit breaker. This shift in strategy is partly due to the appointment of Yi Gang as the head of the PBOC, who has experience in managing currency, battling yuan sellers and capital flight.
Chinese officials are concerned about the CNHUSD rate
The retirement age of key officials in the People’s Bank of China (PBOC) is being used as an excuse for appointments, reappointments, and dismissals. The case of Pan Gongsheng, who is being rushed into the position before his 60th birthday, indicates that the retirement age rule is not being strictly followed. The notion that Janet Yellen’s upcoming trip to China is the main reason for the leadership overhaul, and the alarm over the currency is the primary driving force behind these changes.
PBOC liquidity drain
The Chinese officials are desperate to prevent something truly horrendous from happening, which explains their focus on maintaining yuan stability and reluctance to stimulate the economy despite calls for it. State media coverage in China also reflects their obsession with yuan weakness, further emphasizing the importance of currency stability in their eyes. The PBOC has been net-draining liquidity from the markets, which is unusual during a time when stimulus and easing measures are generally prioritized.
PBOC’s struggles for USD and Capital Flight
It seems like China’s goal is to increase exports and lower the Yuan value, but its priority is to avoid panic and loss of control in the short term. However, recent tensions with the US, the Taiwan situation, the expansion of the Chinese territories to claim southern seas, the TikTok fiasco, Intellectual property theft, Huawei, possible virus leak from Wuhan lab, harsh zero-covid measures and many more have changed its relation not only with the US, but the world.
As a matter of fact, this article by Financial Times tells us that financial managers are selling Chinese assets at the fastest pace ever. Another article by Atlantic Council says that Investors have been “de-risking” from China for years and have sold $148 billion of Chinese bonds since 2022.
It is becoming more and more obvious to investors that China is no longer a safe place to park their money and collect revenues as the risk of sanctions is heightening and the return on their investment eroding because of falling economic growth and aging demographic. Overall, it is the investors who will dictate the outflow or inflow the money to China and not the governments.
Impact of weak Yen on Yuan
The Chinese Yuan and Japanese Yen have historically moved in tandem, but this correlation has posed challenges for the People’s Bank of China (PBOC). While other central bankers rely on the Bank of Japan (BOJ) to keep interest rates low and encourage capital outflow from Japan, this has put pressure on the Japanese Yen and subsequently affected the value of the Yuan. Although both currencies have been depreciating against the US Dollar, the circumstances surrounding each country differ.
Japan has largely recovered from the impact of the Covid-19 pandemic, while China continues to make progress in reopening its economy, albeit with occasional setbacks. The BOJ has implemented continuous easing measures to maintain low interest rates, which has been beneficial for Japanese industries, stimulating output. Additionally, the combination of a low consumer price index (CPI) and a weaker Yen has bolstered Japan’s export potential, making it an appealing destination for investors.
On the other hand, China is grappling with a significant outflow of funds and faces challenges in implementing accommodative monetary policies. This situation restricts their ability to ease monetary conditions and stimulate the economy effectively.
Argentina fires at Yuan
According to Reuters, Argentina has decided to pay for Chinese imports in yuan rather than dollars. Not so much after the release of this news, they decided to use the Yuan for the first time to settle part of its IMF debt. The lack of interest for Argentina officials to hold on to Yuan is not obscured to market participants, indicating that Yuan is fundamentally a weak currency and needs to be devalued.
In conclusion, there is a prevailing expectation that the Chinese Yuan will continue to experience devaluation due to shifting political agendas in China. This shift suggests that even if China were to change its course, the devaluation of the Yuan is already considered a likely outcome. The market sentiment has strongly influenced this expectation, making it difficult to reverse the devaluation trend.