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Friday, January 22, 2016 3:38 AM

China Openly Pledges to Sink the Yuan vs. the Dollar

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China Drops Dollar Peg

If China was really serious about doing what every major country in the world does, it would float the yuan.

On Thursday, I saw this MarketWatch headline: China Serious about Dropping Dollar Peg.

I was totally unimpressed after reading the article.

China will not do the one thing it has needed to do for decades: Let the Yuan float. China still insists on setting artificial pegs that the market openly mocks.

China Pledges to Sink the Yuan

DAVOS, Switzerland--A senior Chinese official Thursday affirmed China's intention to decouple its currency from the U.S. dollar, while the head of the International Monetary Fund urged Beijing to improve communication with markets about changes to its foreign-exchange regime.

For years, China has hitched the yuan's value to U.S. dollar, but its central bank signaled in December that it would break the peg and instead manage the Chinese currency against a basket of 13 currencies.

"We're serious about the basket approach," said Fang Xinghai, a senior economic adviser to the Chinese leadership, at a panel organized by the World Economic Forum here Thursday. "It's a decided strategy."

With a crawling peg, the yuan has appreciated with the strengthening U.S. dollar, hurting Chinese manufacturers while the economy is weakening. Decoupling the yuan from the dollar could help Beijing's effort to rekindle growth.

"There's some catch-up to do" when it comes to adjusting the yuan's value against the dollar, said Mr. Fang, a director-general in the Office of the Central Leading Group on Economic and Financial Affairs, which functions like the White House's National Economic Council. "Once we're done with it, the yuan will be stable again," he said.
Stability Nonsense

The entire notion that a peg creates stability is complete nonsense. But don't listen to me. Instead, ask Switzerland.

China's last peg worked, until it didn't. That peg did help China's export model as long as the US dollar was sinking.

Now China pledges to peg to a basket. In other words, China wants to sink the yuan. Supposedly this will create stability.

To reach stability, China openly admits instability.

Reserve Currency  Nonsense

People keep telling me the Yuan will soon be the world's reserve currency. I have openly mocked such pronouncements for a decade. I mock such pronouncements again today.

China's bond markets are neither big enough nor liquid enough to handle the task. And China still cannot get off currency pegs.

China Drops Currency Peg It Cannot Defend

China Dropped the dollar peg. To what? To a floating peg!

Why? Because China cannot defend the existing dollar peg. China disguised that fact with a "serious" announcement pretending to be something else.

Price of Stability

Expect huge volatility. It's coming.

Instability is the price we have to pay for stability.

Mike "Mish" Shedlock

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