Yuan Movements Highlight China's Attempt to Halt 10th Month of Export Contraction; Major Currency War Coming Up?

Chinese manufacturers see further deterioration in business conditions, down 10 consecutive months as noted in the latest Caixin China General Manufacturing PMI release.

Operating conditions faced by Chinese goods producers continued to deteriorate in December.

Adjusted for seasonal factors, the Purchasing Managers’ Index™, operating conditions in the manufacturing economy registered below the neutral 50.0 value at 48.2 in December, down from 48.6 in the previous month. Business conditions have now worsened in each of the past 10 months. That said, the latest deterioration was modest overall.

Production declined for the seventh time in the past eight months, driven in part by a further fall in total new work. Data suggested that client demand was weak both at home and abroad, with new export business falling for the first time in three months in December. As a result, manufacturers continued to trim their staff numbers and reduce their purchasing activity in line with lower production requirements. Meanwhile, deflationary pressures persisted, as highlighted by further marked declines in both input costs and selling prices.

Manufacturing companies continued to cut their payroll numbers at the end of 2015 and at a moderate rate. According to panelists, lower staff numbers were the result of company downsizing policies and cost-saving initiatives. Fewer employees contributed to an accumulation of outstanding work in December, with the rate of growth quickening to an eight-month high.

December data signaled a further fall in average cost burdens faced by Chinese manufacturers. Moreover, the rate of reduction eased only slightly since November and remained sharp overall. Panelists that reported decreased input costs widely attributed this to lower raw material prices. Manufacturers generally passed on their cost savings to clients in the form of lower selling prices, while some companies mentioned that greater market competition had led them to cut their tariffs

China Manufacturing PMI



Chinese manufacturing has spent far more time in contraction than expansion since mid-2011.

Yuan Devaluation Continues

China is not exactly pleased to see manufacturers struggle and decided to do something about that last August. In a surprise August move, China Joins Currency War With Surprise Devaluation, Biggest One-Day Move on Record.

Back in March, Chinese Premier Li Keqiang told the Financial Times: “We don’t want to see further devaluation of the Chinese currency, because we can’t rely on devaluing our own currency to boost exports."

That lie bit the dust in August. Not to worry, at the time of the devaluation, China said it was a one-time move.

Yuan-US Dollar Weekly Chart



Somehow that does not have the look and feel of a one-time move. But let's put things in proper perspective.

Yuan-US Dollar Monthly Chart



From August 2005 the yuan rallied from 8.09 per US dollar to 6.05 per US dollar in November of 2013. That's a yuan strengthening of just over 25%.

Since November of 2013, the yuan declined to 6.49 per US dollar. That's a weakening of about 6.8%.

Nonetheless, that move represents quite a reversal for hedge funds and others who believed the Yuan would continue to rally vs. the dollar.

More fundamentally, the reversal means China has joined the beggar-thy-neighbor approach of weakening a currency hoping to gain or at least stabilize exports.

Yuan weakening may also ignite protectionism in Congress. Donald Trump is campaigning on that issue right now.

Major Currency War Coming Up?

Japan, China, the ECB, Sweden, Brazil, and Switzerland have all been involved with direct or indirect attempts to weaken their currencies.

Realistically, it's safe to include the US in that list when the Fed was first country outside of Japan to slash rates to zero.

Mathematically, it's impossible for every country to weaken its currency vs. every other currency. That basic fact hasn't stopped a growing list of countries from trying.

With the end of QE coupled with rate hikes, the US is no longer in the debasement by force camp, but if the US economy weakens, the Fed is likely to do anything.

A huge currency crisis of some nature is undoubtedly coming up. The timing of the crisis and where it starts are both unknown.

Mike "Mish" Shedlock