October 18, 5:00 pm EST
Last week, we talked about the signals coming from China, that the economy is running dangerously slow, and their backs are against the wall.
They cut their bank reserve requirement ratio last week for the fourth time this year. And they have been continually walking down the value of their currency (the yuan).
The PBOC pegged the yuan to another 21-month low today. Most importantly, it’s getting closer and closer to the 7 yuan per dollar level – a level we haven’t seen since the pre-financial crisis days.
As we’ve discussed, they have two options. They can play ball on trade concessions with the U.S. If so, the economy slows. They can continue to holdout/pushback on trade, and the trade sanctions may take the economy off the cliff. Both scenarios mean China’s rapid ascent to economic power gets knocked off path.
If holdout is their long term strategy, I suspect we will find that global trading partners will join Trump’s fight against China’s rigging of global trade via its weak currency advantage. That’s not a good outcome for China.
More likely, China is trying to holdout to see the outcome of the November U.S. elections. And as we discussed earlier this month, they are likely trying to wield some influence: “they can sell Treasurys, in an attempt to ignite a sharper climb in rates. And a fast move in rates (at these levels) has a way of shaking confidence in equity markets–which has a way of shaking confidence in the economy.”
It appears that it may be playing out, but worse for Chinese stocks, which are now down 25% for the year.
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