Robert Romano: China’s Strong Yuan Experiment Is Over

|| By ROBERT ROMANO || China’s 10-year experiment with a strong yuan is over. After years of world markets complaining about China’s devaluation policy of a low, fixed exchange rate against the dollar, the People’s Bank of China finally allowed the yuan to begin appreciating in 2005. Fast forward ten…

|| By ROBERT ROMANO || China’s 10-year experiment with a strong yuan is over.

After years of world markets complaining about China’s devaluation policy of a low, fixed exchange rate against the dollar, the People’s Bank of China finally allowed the yuan to begin appreciating in 2005.

Fast forward ten years, with emerging markets now collapsing, China’s real estate bubble popped, commodities crashing and the Shanghai Composite Index imploding, and now Beijing has cried uncle and is once again devaluing, desperate to curtail the drop in asset prices.

This price appreciation had been urged by the U.S. in particular to supposedly remedy global trade imbalances.

As recently as Oct. 19, 2015 – just as the air was coming out of crude oil and the  – that was still the posture of the U.S. Treasury, which said the yuan was still undervalued in a report.

“[O]ur judgment is that the RMB remains below its appropriate medium-term valuation,” the Treasury report stated.

Whoops. So much for that.

Either, in its infinite central planning wisdom, the People’s Bank of China overshot its target. Or, the U.S. actually got what it wished for and “rebalanced” the global imbalances – with the unintended consequence of the China crash taking the global economy with it.

The worst part is, it could get worse, according to an Oxford Economics simulation on further yuan devaluation reported by Bloomberg Business’ Enda Curran.

“If other exchange rates respond to yuan weakness, as they did recently, the effect suddenly becomes more substantial and differentiated,” Curran wrote, adding, “Here’s how Oxford reckons this scenario would play out: Euro zone and Japanese growth would be among the hardest hit because their effective exchange rates would gain, adding deflationary pressure. That could force the European Central Bank and Bank of Japan to ramp up quantitative easing.”

So, if China keeps devaluing the yuan – as its central bank currently is – Oxford finds it will only add to the current deflationary pressure over here, bringing asset prices down even further.

Although markets have temporarily rallied on news of monetary stimulus from Europe and Japan, it is still may be extremely bearish over the longer term. Stimulus means markets are weak, not strong.

As for the Beijing’s continued devaluation, what alternative does China have?  Prices are collapsing there anyway.  All it can do is devalue to forestall the plunge, knowing that plunge is precisely what it will do anyway.

They’re called vicious cycles for a reason.

And until this one finds its bottom, that may mean there is more pain on the way. In the meantime, perhaps the U.S. Treasury should be more careful of what it wishes for in the future.

Robert Romano is the Senior Editor of Americans for Limited Government.  This piece (reprinted with permission) originally appeared on

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fl ? p January 25, 2016 at 12:26 pm

Will Trump have to find someone else to make his crappy clothes? Oh my!!!

Rocky Verdad January 25, 2016 at 1:11 pm

He’s gonna give them out for free. Grey and blue strips, little yellow stars on the chest, one size fits all.

fl ? p January 25, 2016 at 3:26 pm

Speaking of which, I wonder if he’ll contract Hugo Boss to make his uniform line like another famous, charismatic angry guy did.

fl ? p January 25, 2016 at 4:29 pm

You be funny Rocky.Thanks for selling your EBT card to me for .50 on the dollar.

fl ? p January 25, 2016 at 5:14 pm

I do not have an EBT card thank you, that would be you sir. I have a job, you do not.

Not all bad January 25, 2016 at 12:46 pm

The American Economy is fundamentally strong. Bad times in China will be good for us in the long run, if we can muster the will to stop buying Chinese crap and stop exporting American jobs to China. As they drop the Yuan, we should raise tariffs to offset the drop. .

sparklecity January 25, 2016 at 2:03 pm

You can TRY to stop buying Chinese made products till the cows come home but as long as the retailers offer it it won’t won’t make a hill of beans.
Look at Walmart…they used to tout American made products..those days are log gone (I’m not a Walmart patron BTW)
I don’t like it anymore than anyone else but just try to find an American made TV,stereo or any other American made electronic device let alone clothes,shoes,etc. Except for extremely expensive Hi-Fi systems there ain’t no such thing made in America any more

Bible Thumper January 25, 2016 at 1:06 pm

Someones mess’n with Texas.
Dallas Fed Manufacturing Index falls to Great Recession level.

Rocky Verdad January 25, 2016 at 1:09 pm

Well fortunately Ted Cruz is Canadian. His favorite bands are Rush and Triump and April Wine, he dreams of playing Julian in a remake of Trailer Park Boys (he wants Flip to be Bubbles), eats french fries with beef gravy and cheese curds, secretly speaks French and dreams of Montreal hotties.

TroubleBaby January 25, 2016 at 1:42 pm

Much of Texas’s manufacturing came/comes from the oil industry, hence the slump with the precipitous drop in the price of oil.

sparklecity January 25, 2016 at 1:54 pm

Only question I have is:
Why ain’t the price of kerosene and moror oil (10W-30,5W-20, etc.) come down????

TroubleBaby January 25, 2016 at 2:40 pm

that’s a whole different ball of (paraffin) wax, but much of the cost in motor oil is secondary processing, to some degree there’s some further processing of kerosene too…but it’s not my expertise so I’ll defer to someone here more knowledgeable in that area….there’s the whole issue of Keynesian “stickiness” price levels(usually referred to in wages), which may have some merit but rest assured that if a barrel of oil substantially reduces the cost of other products as an input cost, that the costs of those items will eventually come down.

There’s a whole lot of other input costs to motor oil though…

sparklecity January 25, 2016 at 5:04 pm

From what I understand, gasoline is at the top of effort to distill with kerosene below and oils even further down on the distillation/processing chain (in other words it’s more expensive to distill gasoline than kerosene, diesel, etc. from the same proverbial barrel of crude oil).
What used to cost 99 cents for a quart of 10W30 generic brand (Advance Auto, O’Reilley’s, etc) is now around 3-4 bucks (IF you can catch it on sale that is…) kerosene has been way overpriced for a number for years as has diesel.
I hope/expect it will come down as well but like so many things, complacency rears its ugly head and people get used to paying a higher price and don’t make a stink when it ought to come down.
Just like ammunition…all the dumbasses horded ammo and now that “it don’t look like “Obammer” ain’t gonna come and get your gun ammo is readily available but hasn’t come down all that much. Those paranoid dumbasses caused the panic buying and the rest have to suffer for it. I never went in for it and refused to buy at those obscene prices. I just did without.
The ammunition manufacturers knew a good thing when they saw it (whatever the market will bear). Can’t really blame them but it pisses me off anyway – same thing with motor oil & kerosene

Soft Sigh from Hell January 25, 2016 at 7:35 pm

“kerosene has been way overpriced for a number for years as has diesel.”

They are just about the same thing. I’ve wondered why they have stayed so expensive relative to gas, but haven’t a clue. Jet fuel is about the same too. I wonder if it has stayed high.

More reasons January 26, 2016 at 9:23 am

Here’s an interesting write up on diesel vs. gasoline, taking about now the low sulpher,higher excise taxes, & perhaps higher global demand:

Rocky Verdad January 25, 2016 at 2:04 pm

Hyung liong dong.

fl ? p January 25, 2016 at 4:30 pm

Whisper that in my ear darling!


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