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Central Bank of China scare market and investors deliberately

Beijing sends clear signals to the Fed.

People's Bank of China set yuan fixed rate at the minimum of three weeks, and the current period of devaluation has become the longest since the start of January. Traded yuan is currently down by more than 1.1% against dollar. Devaluation of the national currency on free trading in Hong Kong has been going on for six days in a row, and it is the longest decline since April 2014 It is interesting that, despite such active movement, yuan is relatively stable in 2016 and periods of devaluation alternate with strengthening days.

Taking into account what is happening, it is much easier to believe in the version that the Central Bank of China scare market and investors deliberately by giving signals on inadmissibility of the rates’ increase to FRS. Raising the rates by the US will lead to another strengthening of dollar against other currencies. In this case competitiveness of exporters, particularly in developing countries, will be reduced, and it is extremely undesirable in the current economic climate. Meanwhile, FRS controls very carefully growth of stock market, since now it is the only thread that still somehow provides visibility of economic well-being. Increasingly, analysts and experts note divergence of official statistics with the real situation. If FRS is not able to keep the growing market, it would mean almost a complete failure of the monetary policy.

     In the recent months almost every action of the American regulator has been aimed to maintain a positive trend of assets’ value, and that is what Beijing has chosen as the main purpose. But if there is relative stability is visible in relation to dollar in 2016,  devaluation has been continuing in regard to CFETS RMB Basket Index currency basket, which includes 13 currencies weighted by the volume of foreign trade. However, euro and yen have weakened against yen, so the basket gradually goes back to dollar. All of this only confirms that Beijing is sending clear signals to the Federal Reserve: just tighten policy, and we will make chaos in the market due to the weak yuan.

 

 

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