Again, I must admit that, although I have the Chinese Renminbi (Yuan) on my Bloomberg screen, I don't focus on it every day. Today, however, was a day I thought I would at least glance at it. This blog is not easy to write and I am sure won't be easy to read and understand but here it is anyway. Lots of cause and effect in this blog.
I wonder if China is between a rock and a hard place as they balance out the desire to have a weak currency (helps their exports) with their desire to maintain and attract all that capital that we hear is flowing (or used to flow) to the Vancouver housing market. They need capital inflows for investment to keep the economy growing at the huge clip it grows at (~7% GDP).
I will show and explain this chart first and then explain why they may be between a rock and a hard place and how that may affect us here in North America.
The yellow line are Estimated Chinese Capital Flows (on the LHS) and the white line is the US$ vs Offshore Chinese Renminbi (yuan on RHS) (the higher the white line goes, the stronger the US$ is and the weaker the yuan is).
Let's start at the left side of the chart. Note that in the Fall 2015, Chinese Capital Flows (yellow line) starting turning very negative (big Outflows of capital...not good for re-investment in the economy).
But the Chinese authorities (the People's Bank of China (PBOC)..(ya, like the average Chinese person has any say about anything to do with the PBOC!) need to maintain an artificially weak currency for their export machine as you can see in late 2015 and early 2016 with the yuan getting weaker (white line up) while capital continues to flow out.
By Jan 2016, the PBOC react to the capital outflows and tightened monetary conditions a bit so as to stem those capital outflows (anyone remember how global risk assets like stock markets responded to this tightening in Jan/Feb 2016?? Wasn't so good). You can see how the yuan got stronger from 6.7 to 6.5 as a result and capital flows started improving immediately and significantly. But that didn't last and the yuan continued to weaken right into the end of 2016.
Now look at the rest of 2016. They kept monetary policy accommodative enough so as to continue weakening the yuan up to the top/right of the chart (7.00 area/US$).
But also look what is starting to happen to capital flows again...they are turning more negative (more outflows) which we know to be bad for re-investment in the economy...which we know to be bad for China's GDP. And we know that, in the past, the PBOC has tightened up monetary conditions to help strengthen the yuan to help improve capital flows...and we know this tightening was not good a year ago for risk assets around the globe (Jan and Feb 2016 the S&P 500 was -1.6% and -5% respectively).
So if China's GDP matters to the rest of the world, this all matters to us here. Damned if they do, damned if they don't.
Not sure how the PBOC balance the yuan with the capital outflows but I think we should keep an eye on it more often now.