The Wall Street Journal reports, "One way to read China’s clear efforts to drive down the value of the yuan is that it is a belated effort to deal with the competitive pressure and externalized deflationary effect of the “Abenomics” policy framework in Japan, which drove down the value of the Japanese yen and put pressure on currencies throughout Asia.
China always marches to a slightly different drum than the rest of the world – simply because, with capital controls and a much more centrally planned economic model, it isolates itself from the market forces that tend to push the rest of the world’s currencies and assets around in quasi-unison. But eventually the same pressures that forced those equilibrating adjustments everywhere else become unbearable. As much as the PBOC’s move to weaken the yuan seems designed to facilitate a widening in the currency’s trading band to make more room for market forces, its hand might not have been forced if not for the outside effect of external currency competition. As the Bank of Japan embarked on a monetary stimulus program to spur inflation and break the back of a long-lasting deflationary problem at home, it drove down the value of the yen. That was followed by declines of differing degree in currencies of many emerging-market countries with which China competes. Those corrections were typically blamed on a combination of domestic politics, structural imbalances in countries’ external accounts, and tighter liquidity brought about by the U.S. Federal Reserve’s efforts to taper its bond-buying program. But the fact is that a weaker currency for one of the world’s biggest exporting nations also had a profound effect on those other countries’ export competitiveness, forcing depreciations as a way to offset it. That in turn created an unbearable competitive loss for China as the yuan continued to appreciate against everyone else. The other way to think about it is that, as many economists put it, Japan “exported its deflation” through Abenomics. As China imported some of that deflation, the antidote became a devaluation in its currency. The upshot – and here’s the positive part – is that China should be left with a more market-driven currency that’s better able to deal with these adjustments ahead of time.
CHINA: The yuan fell sharply Friday, at one point hitting a 10-month low against the dollar, amid signs that the central bank was intervening to push it lower – perhaps to lay the groundwork for widening the permitted trading band.
The yuan made back a bit of ground in the afternoon but still finished the Asian day at an eight-month low, with its decline early in the day dragging other Asian currencies lower as well. That comes after a days-long slide in the yuan, which shook global markets accustomed to viewing the yuan as a one-way appreciation bet, appeared to have halted Thursday. The volatile trading comes just before the start next week of the National People’s Congress meeting, which could produce further liberalization of China’s currency regime. Many analysts believe authorities are preparing to widen the band within which the yuan can trade each day to 2% in either direction of the daily fixing – from 1% now – and that the sudden and unpredictable moves in the currency are being engineered by Beijing to shake speculators out of the market".
