China Losing Control of Yuan Depreciation ahead of Trump Presidency

China has tried to depreciate the yuan in a controlled manner, but, increasingly, this is becoming more and more difficult to maintain. Investors and businessmen, knowing this, have placed bearish bets on the yuan or converted yuans into dollars, which hastens the decline of the second largest economy’s currency. 

China has pushed a weaker yuan since it entered into the International Monetary Fund’s group of reserve currencies in early October. The yuan’s decline increased when Donald Trump won the U.S. presidential election. That victory hastened the US dollar’s year of gains. Emerging-market currencies tumbled. In 2016, the yuan is down 6.2% against the dollar this year onshore. The People’s Bank of China doesn’t want the currency to slide in a chaotic manner.

“The PBOC may intervene” according to Prashant Singh, a senior portfolio manager at Neuberger Berman in Singapore. A poor global economy and tensions between the U.S. and China, however, signal to Mr. Singh: the decline will continue. 

“Central-bank-led interventions are typically temporary in nature,” says Mr. Singh. “The fundamental factors still point to weakness.”

Some state-owned banks have sold dollars to support the yuan in the last week, according to the Wall Street Journal. Yet the yuan depreciated to its lowest level versus the dollar in eight years, traders say. 

Some, like economist Yu Yongding, are urging China’s central bank adopt a different approach.

“We don’t need to worry too much about the short-term depreciation of the yuan,” he said. He wants the yuan to find it’s free market price, he claims.

Intervention could lead to more money leaving China, as demonstrated by the nation’s efforts last month to better regulate the nation’s Bitcoin exchanges.

With Donald J. Trump set to take over the Presidency, experts worry about future trade wars between China and the US, as President-elect Trump has called Beijing a “currency manipulator.” The president-elect has threatened new tariffs on Chinese goods.

“We have capital controls as the last line of defense,” Mr. Yu stated in state media this week. “We don’t need to worry too much about the short-term depreciation of the yuan.”

This laissez-faire attitude towards yuan depreciation could further inspire Chinese investors to put money into Bitcoin, as has been the case in recent years. Rumors abound of Chinese plans to implement a more robust regulation regime for the nation’s Bitcoin exchanges.

You can see the Dollar’s appreciation in the chart below against Bitcoin.

usd-appreciation

usd-appreciation

Interestingly, Bitcoin has followed USD only move for move. Early in its existence, Bitcoin was dubbed “digital gold,”  but eight years into the Bitcoin Projects, its price behavior suggests a more complicated interpretation of what Bitcoin is is needed.

btccny

btccny

There’s nothing to suggest that, until President-elect Mr. Trump takes presidential office, a change in the trend illustrated in the above charts. Bitcoin’s on its way to yet another banner year, if so.

Image from Shutterstock. Charts from BitcoinWisdom and Yahoo finance.