China Black Swans Not So Rare Anymore as PBOC Shocks Markets
Investors should prepare for more surprises out of China after the yuan’s devaluation became the country’s latest unexpected policy move to roil global markets.
That’s the advice from Fraser Howie, co-author of “Red Capitalism: The Fragile Financial Foundation of China’s Extraordinary Rise.” He says Chinese policy decisions are becoming “erratic” as authorities struggle to combat the nation’s deepest economic slowdown in more than two decades.
This week’s tumble in the yuan — the biggest devaluation since 1994 — comes just a month after unprecedented state intervention in the stock market deepened a $4 trillion sell-off. Two years ago, authorities triggered the country’s worst modern-day cash squeeze by restricting the supply of funds to the banking system. The failure of China’s decision makers to telegraph and explain those policy changes has increased volatility worldwide as traders struggle to forecast what happens next in Asia’s biggest economy, Howie said.
While investors parse every word in Federal Reserve statements for clues on future U.S. monetary policy, the People’s Bank of China provides few such details, while decisions are often the result of political wrangling, according to Howie.
“We don’t know what their policy is,” he said. “We don’t see minutes of meetings. We don’t get regular announcements, so we get a tremendous lack of transparency.”
Yuan Plunge
The PBOC took markets by surprise when it cut the daily fixing for the yuan by 1.9 percent on Tuesday, ending a four-month peg against the dollar. The currency tumbled 2.9 percent in two days, the most since the country ended a dual-currency system in 1994, while it now trades at the biggest discount to the offshore yuan since 2010.
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