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.
