At the time of writing, China’s usually highly secretive monetary authorities are heavily intervening – selling dollars and buying yuan – to stop it falling much further. Or, at least, that’s what we’re told.
Having been explicitly pegged to the dollar until 2005, the Chinese currency has for 10 years remained closely controlled under a “managed float”. The central bank, in other words, has used its vast $3,700bn (£2,360bn) haul of foreign-exchange reserves, as well as capital controls, to keep the yuan within a strict trading band. Until last week, the largest single-day move against the dollar this year had been just 0.15pc. So a 4pc drop in just a few days is huge – the biggest shift since the mid-Nineties. What’s alarming is that, were this depreciation to get out of hand, with the Chinese currency dropping very sharply, import prices and inflation would spike.
That could force Beijing to reverse recent interest rate cuts, potentially bursting China’s property bubble and, at the very least, undermining the broader economy – which, for some years now, has acted as a locomotive, pulling along the rest of the world.
Along with cheap consumer goods, China has also been exporting deflation to the rest of the world — working at odds with the Fed and other Western central bankers, who have been furiously trying to bring inflation up into the 2-3% range.
(We’ll talk another time about the wisdom of setting inflation loose on purpose, with the hubris only a central bankers can have about keeping it under control.)
The point being that Beijing now finds itself in a very uncomfortable position where the only way to save their economy might disrupt the global economy — which would bring down their export-driven economy.
I’m going to need a bigger cup of coffee, or perhaps a liquid lunch, before trying to figure out all the ramifications of that scenario.