Right at the beginning of this year, you will recall that the global stock markets and other risk assets got smashed pretty hard. There was some concern that China was devaluing their currency, the offshore yuan. The yuan is "pegged" to the US$ which means that the People's Banks of China (PBOC) keeps the value of the yuan against the US$ in a very tight band.
For many years (over a decade), G7 countries have been putting pressure on China to revalue the yuan stronger. This would enable China to import more goods and services from the US and other nations around the world as, with a stronger yuan, it would make all of those goods and services cheaper for Chinese buyers.
But first, I will make a statement about the options open to policy makers (both politicians who control fiscal policy and central bankers who control monetary policy) to help get their respective countries out of the stagnating nature of the post-credit crisis debt-laden economy:
Lets just deal with (1) for now. Have a look at what China did to the yuan in Jan and Feb of this year. They allowed the yuan to weaken against the US$. (The chart is US$/Yuan so a higher line is a stronger US$ and a weaker yuan). So this was the start of China entering the currency devaluation wars, along with every other nation on earth, save for the USA. Note the up-arrow in Jan/16. The fact that China decided it needed to enter the currency devaluation wars was a signpost to us that the Chinese economy was weaker than most folks thought.
Then we will look at China getting nervous about the pace of decline in the yuan. To "control" their currency's depreciation, they jacked up the o/n lending rates to "punish" the yuan shorts by making it very expensive to borrow yuan. Have a look at these o/n rates getting to 68%...that's right, you read that correctly. and look what is happening again with o/n rates in offshore yuan over the past few weeks on the far right with the red arrow:
And finally, look how nervous the stock market (and other risk assets) got when the o/n yuan rates spiked so high. Here is the ACWI ETF which is probably the best overall metric of the global stock market. It dropped about 15.5% over about a two month period. It obviously rallied back pretty strongly.
I wonder if we are in for another potential buying opportunity?