Is The Yuan’s 2015 Devaluation The Wrong Template To Look At Now

By Ye Xie, Bloomberg Markets Live commentator and reporter

Three things we learned last week:

1. The yuan’s relentless rise is fueling fear of a repeat of the 2015 debacle.

With the trade-weighted yuan at the strongest in five years, there’s growing concern that the currency is becoming so expensive that it will eventually crash. “This is a repeat of what got the RMB in trouble in 2014,” Robin Brooks, chief economist at the Institute of International Finance, tweeted. “Back then, RMB was quasi-pegged to the dollar, which rose sharply, dragging RMB up with it. That episode ended with the surprise “step” RMB devaluation in Aug 2015.”

 
The similarities between now and then are many. Like 2015, the economy is faltering amid a deleveraging campaign, just as the Fed moves to reduce policy accommodation. But concern over similarities may be overblown. The ongoing pandemic has been a boon for China’s balance of payments. It reinforced China’s role as a global factory, resulting in a record trade surplus. Meanwhile, traveling abroad has diminished, cutting off a dominant source of capital outflows. Instead of outflows like in 2015, money has been pouring into stocks and bonds, as well as via FDI. In short, a strong yuan has fundamental support, noted Morgan Stanley. (Their strategists recommend long yuan vs euro and the Indian rupee.)

 
2. Beijing is stepping up efforts to calm the real-estate market.

High-yield property bonds rebounded strongly late last week, amid reports of some easing of restrictions in the housing market. On Friday, the PBOC reiterated a pledge to foster the “steady and sound” development of the property market. The authorities are trying to stop the contagion from spreading to stronger companies. But developers still need to come up with money somewhere to repay the debt, and there’s still a lot coming due. The tide is going out and we’ll know who’s swimming naked.
 
3. Inflation concerns pushed forward Fed rate-hike expectations.

The U.S. 10-year TIPS breakeven rate surged to the highest since 2006, following a shocking CPI report that exceeded all economists’ estimates. Meanwhile real yields dropped to record lows. The set-up looks similar to the one before the Taper Tantrum in 2013 when the Fed’s abrupt hawkish pivot roiled global markets. In China, while PPI rose to the highest in 26 years, the pass-through to CPI remains limited, allowing some flexibility for the PBOC to ease policy, when needed.