Submitted by SaxoBank’s Dembik Christopher via TradingFloor.com,
Currency stability is a prerequisite for China’s economic transition
Defending the yuan is prohibitively expensive – China cannot beat the market
Progressive devaluation managed by PBoC is the most probable scenario for 2016
Remember that the country is on the capitalism learning curve
Exchange rates will inevitably be a key discussion point at Shanghai G20
China has moved from being a net importer to a net exporter of capital
Shoring up a currency ad infinitum is impossible. The market always wins. The undervalued Chinese yuan is nothing but a bad memory. In the context of competitive devaluations throughout the world, the yuan is now significantly overvalued compared to its main counterparts, primarily the dollar and the euro. If it is to pull off its economic transition, China needs a stable currency, hence its repeated interventions on the exchange markets over the past few months. Over the last year $513 billion was drawn from the foreign exchange reserves without stemming any of the downwards market pressures on the yuan. Over the period is actually lost 5% against the US dollar. This is a significant depreciation for a currency that is used to fluctuating between narrower markers.

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