2012-04-20

Albert Edwards agrees: wider yuan band can allow faster devaluation of renminbi

"Utter, Utter Piffle" - Albert Edwards Lashes Out At The Media's China Groupthink
What a dunce I am. So silly of me to think China might be hard-landing! I now stand corrected. I was reading about China’s widening of the yuan trading band and found a story with the above quote from an expert. Apparently widening the yuan trading band is proof that China is not hard-landing. Why? Because otherwise the authorities would not have sanctioned such a move. What utter, utter piffle. There remains massive market over-confidence in the ability of the Chinese authorities to achieve a soft landing. And as the IMF now agrees with Chinese Premier Wen Jiabao that the yuan is no longer overvalued, it seems to me that on both technical and political grounds, the likelihood of a yuan devaluation has just increased.
The bulls on China seem to have a trend following attitude that since it worked before, it will work again, and the Chinese government won't "let" bad things happen to the economy. I'm mixed on the market because there are still plenty of ways to get rich in China, but investing in the stock market at this point may not be one of them. Edwards turns to this chart, which shows the yuan has been consistently falling in market trading. Why would a widening band make it more likely for the yuan to rise? This forecast is completely at odds with the market!

Speaking of yuan valuation, now investors will be able to place their bets with futures: HKEx set to launch yuan futures this summer
Hong Kong Exchanges and Clearing plans to launch yuan futures in the third quarter, a move that would help investors hedge their exposure to the currency and solidify Hong Kong's status as the main centre for the offshore yuan trade.
HKEx announced the plan yesterday, just one day after HSBC issued the first yuan-denominated bonds in London in a big move to advance the City of London's push to become a major centre for the offshore yuan trade itself.

The exchange's chief executive, Charles Li Xiaojia, said the plan "reflects our desire to support Hong Kong's development as an offshore RMB centre". He called the initiative part of the exchange's "strategy to expand beyond equities and equity-related derivatives".
One reason why so many people believe the yuan is a one-way bet is because there have been few outlets for bearish sentiment. As the yuan is internationalized, the bears will be able to place their bets. Even if the bears are wrong, as these products come to market, they yuan will seen downward pressure because the bulls can already place their bets.


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