As most of you know –tough to miss considering that all the news is discussing it- the Chinese stock market took another dive last night. As a matter of fact the CSI 300 index plunged 7% and the market closed in under 30 minutes, which means that Erich did NOT get a good night sleep.
Part of the reason is that while the Chinese government is devaluing the yuan, they still have to spend money to buy yuan to control the fall. After all, devaluation is causing dramatic capital outflows already. The funny thing is that since 2011 the government has complained about an excess of foreign exchange reserves. However, we can all be certain that they do not want a feeding frenzy and a complete collapse of the yuan. The PBOC said back in 2011 that reserves exceeded a “reasonable” level when they were just over $3 trillion. The latest figures show them at $3.3 trillion, after peaking at almost $4 trillion. So, what is “reasonable”? I suspect that something under $3 trillion is the goal. What does this mean? More devaluation, more stock market volatility. And, the Japanese – I mean Abe- must be HATING this, as their currency has risen, because many investors in Asia rush to Japan when things look bleak in China.
Who needs Star Wars when we have Currency Wars.
PS. This is all to say that in today’s world the markets ALL revolve around central government actions.