Crypto Traders Need to Pay Attention to Chinese Yuan

China's yuan (CNY), one of the five currencies in the International Monetary Fund's special drawing rights basket, has depreciated by 2.7% against the U.S. dollar (USD) this month, its worst performance since September.

Going back to February, the decline goes to 5% versus the greenback, and investment banking giant Goldman Sachs suggests it could drop further.

Historically, yuan devaluation has been considered bullish for fiat currency alternative assets like bitcoin and gold, but the other side of that coin is a strong dollar. The U.S. unit is already on a rising trend and further strength might lead to continued monetary tightening worldwide and a headwind for risk assets, cryptocurrencies among them, say some observers.

The People's Bank of China (PBOC), the country's central bank, loosely pegs CNY's value to a basket of 24 currencies through a managed-float system. The daily fix or midpoint is set every trading day to provide direction to the market. The currency basket reflects China's trading partners, and with the U.S. being the largest, the dollar has the highest weighting at 19.83%. The euro, Japanese yen, British pound, Australian dollar, Mexican Peso are some of the basket's other currencies.

The PBOC's managed float allows the yuan to fluctuate 2% on either side of daily fix, and the bank manages that band via active buying and selling of yuan. If USD/CNY threatens to rally beyond the 2% limit, for instance, the PBOC sells the dollar and buys yuan to shore up the latter's value. At the same time, the bank buys the dollar against other currencies to keep the proportion of the greenback in reserves stable, ensuring the intervention gets recycled back into other foreign units.

This process inadvertently puts upward pressure on the dollar index, mainly comprised of the euro and the Japanese yen, causing financial tightening worldwide and leading to risk aversion.

USD/CNY rally means PBOC will sell the pair to maintain the 2% band and has to buy the dollar against other currencies to maintain a stable proportion of USD in reserves. That pushes up the dollar index, leading to financial tightening and risk aversion," David Brickell, director of institutional sales at crypto liquidity network Paradigm, told CoinDesk.

Those with borrowings in the U.S. dollar and receipts in other currencies struggle to service their debt when the dollar surges. Per Brickell, more than $17 trillion of USD debt has been issued outside of the U.S. Thus, dollar strength tends to create risk aversion worldwide.

The dollar index has rallied 2.7% this month. Bitcoin, meanwhile, has declined by 7.3%, its most significant monthly loss since December. Noelle Acheson, former head of research at CoinDesk and Genesis Trading, said that the PBOC's interventions may be dollar bullish but stressed that such actions are not assured.

The PBOC has been hinting at more flexibility on the CNY target band than in the past - so it's not a given that it will intervene, especially if a weaker yuan helps exports (which are suffering)," she wrote in her latest newsletter. "Now China's priorities are different - also, PBOC has been diversifying reserves and could buy gold instead of more USD."

Last month, PBOC Governor Yi Gang said that the central bank can wind down regular interventions, providing market forces more leeway in determining the yuan's exchange rate. Yi, however, stressed that the bank retains the right to intervene in times of market turbulence.

[That’s very reassuring...the common assumption is that China is more stable economically than the US.]

The old saying “still waters run deep” applies especially to China, a despotic empire where only one man, the ruler, is truly free. The stability is a sham, imposed at great cost, such that when the artificial calm falls apart, it does so with a force that destroys millions of lives within the empire.

A decade before the Civil War, China went through a major disturbance that ended a year before the surrender at Appomattox. Its death toll? An estimated 20m (2/3 of the Civil War population), a good chunk of it through large bloodlettings like the one below, recounted in Stephen Platt’s Autumn in the Heavenly Kingdom:

[The Manchu government set into motion a broad campaign to hunt down and execute all of the followers of the Taiping they could capture, sending refugees fleeing to the safety and stability of the British colony. Qing officers couldn’t touch the Taiping-controlled regions around Nanjing, but in other parts of China still nominally under the control of the central government, the purge of sympathizers was merciless. The government’s targets included not just the partisans themselves but also the relatives—however innocent—of every known member of the Taiping movement out to the furthest branches of their family tree. The Qing governor-general in Canton, just a hundred miles up the Pearl River from Hong Kong, led an especially brutal regional effort to crush the sympathizers. In response to a secret society uprising that he determined (most likely erroneously) was in support of the insurgents in Nanjing, his agents cast a dragnet across the province in 1854 that ensnared an estimated 75,000 accused Taiping supporters. And for those who weren’t immediately captured, the government set up suicide stations: pavilions with tools for killing oneself (daggers, ropes), emblazoned with placards calling for supporters of the insurrection to choose a quick self-imposed death over the eventual capture and dismemberment that would bring greater shame to their families.26

Through 1854 and into 1855, the governor-general in Canton oversaw what the British consul described as “a series of executions, among the most horrible for extent and manner, of which the world has any authentic records.”27 According to one British eyewitness, tens of thousands of accused Taiping supporters were slaughtered in the Canton execution ground, a narrow alleyway crammed with pottery (it being a marketplace in less troubled times) that stank with congealed blood. “Thousands were put to the sword, hundreds cast into the river, tied together in batches of a dozen,” he testified, and he watched in horror as the accused were butchered—one executioner to grip the topknot of the bound, kneeling prisoner, and another to chop off his head with the sword. Despite the cramped quarters, the teams worked with revolting efficiency, and this witness counted sixty-three men decapitated in the space of four minutes before he had to stop watching. “I have seen the horrid sight,” he wrote, “and the limbless, headless corpse, merely a mass of flayed flesh among headless trunks, that lay in scores covering the whole execution-ground.” There were chests for sending the severed heads of the prisoners up to the governor-general as proof of effective punishment, but so many were executed that their heads wouldn’t fit, and the executioners eventually packed only the ears (the right ears, specifically), which alone filled the boxes to overflowing.28]

Disclaimer: Opinions posted on Free Republic are those of the individual posters and do not necessarily represent the opinion of Free Republic or its management. All materials posted herein are protected by copyright law and the exemption for fair use of copyrighted works.