THE YUAN THE MARKETS AND DING DONG YITING CHANG. copyright:dingdong

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1 THE YUAN AND THE MARKETS DING DONG YITING CHANG copyright:dingdong

2 RMB TO USD A FIVE YEAR TREND data source:

3 RMB TO USD A FIVE YEAR TREND data source:

4 DEPRECIATION OF RMB NEW TREND SINCE JAN,2014 China s Side: 1.Long-term base for appreciation of RMB is changing: Accelerated economic recession, fears of hard-landing; Declining returns to capital and risk appetite; Narrowing trade balance surplus, turns net exporter of capital; 2. Excess Liquidity and over-supply of money and credit: Higher growth rate of M2 money supply than GDP; Weaken wealth effect of real estate and stock market, Plus easy money and credit, self-reinforced effect of capital outflow 3. Reliance on depreciation of RMB to boost slowing exports: Sluggish investment and stagnant consumption climate, heavy burden on exports; Disappearing demographic dividend and lack of economic engines of growth;

5 DEPRECIATION OF RMB NEW TREND SINCE JAN,2014 U.S. s Side: Evolving long-term base for appreciation of USD: 1.Relatively fast economic growth(decline in non-farm unemployment rate); 2.Having quitted QE, USD entering long-term interest-rate hike cycle; 3.Rising risk appetite in the U.S. market, indicated from credit data; Consequently, Narrowed spread(between interest rates) accelerates the outflow of capital, particularly hot money, and the depreciation of RMB to USD.

6 RMB TO USD A ONE YEAR TREND data source:

7 RMB TO USD WHAT HAPPENED ON AUG 11, 2015? RMB Exchange Rate Reform new quotation mechanism for central parity in RMB exchange market

8 THE MARKET WHY THIS REFORM MATTERS? Previously: In theory, it is the marketmakers, not the central bank, that set the midpoint and thus the trading band. In practice, the PBOC gets marketmakers to submit rates that will yield its preferred midpoint, irrespective of market sentiment. Now: The midpoint would simply be the previous day s closing value. See the Economist:the Battle of Midpoint(Aug 15,2015)

9 THE MARKET WHY THIS REFORM MATTERS? Aug 11,2015: The new market-determined midpoint immediately fell by 1.9%, the biggest single-day drop in the yuan s modern history. Aug 12,2015: An even weaker market-determined midpoint on August 12th, whereupon the yuan fell yet again, sparking fears that the currency might be on the brink of a rout. PBOC(the central bank) intervened: It ordered state-owned banks to sell dollars and buy yuan, propping up the exchange rate at the very time that it was being accused of devaluing it.

10 THE MARKET ONE STEP BACK,TWO FORWARDS? On the one hand, the state understands that the lack of 2inancial options for Chinese savers is unpopular, wasteful and bad for the economy. On the other, it is threatened by the ructions that liberalisation creates. China should have cleaned up its 2inancial system and freed its exchange rate when money was still 2lowing in. Better would be for China to strengthen capital controls temporarily and at the same time to stop stage-managing the yuan s value. When the time is right, China s leaders must choose the markets.

11 BUT, WHEN IS TIME RIGHT AT A LEFT COUNTRY? John Doe

12 THE YUAN AND THE MARKETS WHAT HAPPENED SINCE JAN,2016? TWO BIRDS, ONE YUAN

13 THE YUAN AND THE MARKET A NEW SOLUTION? With the central bank's intervention, RMB rises against USD for three consecutive months in March, while at the same time depreciates against a trade-weighted basket of currencies. The appreciation against USD, helps the authority stem the outward 2low of capitals from China, which upturns the decreasing size of foreign exchange reserves since last year as well. The depreciation against currencies of trading partners, however, will boost the export as expected. See Bloomberg:Two Birds,One Yuan as China Gets Both Weak and Strong Currency (April 1,2016)

14 CAPITAL CONTROL FREE MARKET