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Disagree. This totally makes sense. Yesterday people in America were buying TV's from people in China. Let's say the price of a given TV was $140. Now that t

Disagree. This totally makes sense. Yesterday people in America were buying TV's from people in China. Let's say the price of a given TV was $140. Now that the CNY/CNH is 'lower' (in the sense that you now need more than 7 CNH to buy $1), the price of those TVs just fell. Now maybe the price of the TV's at $140 was in some contract, but the next time the contract comes up for review, the lower CNY reflects the fact that someone in China will accept 'less' for their TV than they were yesterday. Extend this logic from a 1% move to a 20%. As prices fall, maybe people start buying more of their TVs from China than South Korea, cause relative to the price of TVs from SK, the Chinese TVs are now a 20% discount. ~~~ Now, whether a falling FX makes for greater or lesser demand for Chinese financial assets, that's a different story. Would expect this to prompt capital flight. ~~~ And finally, yes, currency does pay a dividend. Just usually in the form of a different interest rate. So for 'lending' to a developing currency (in the form of buying a financial instrument or holding a bank account), you generally earn the local interest rate. When capital deems that country as more risky, then that is reflected in the yield of short term interest rates. Were you to lend to Brazil, you might want 1,2 or even 5% more than you get for lending to JP Morgan or the US Govt. Now, the fact that this 'interest rate spread' doesn't really exist vis-a-vis China, well that's the whole issue at stake. If interest rates in China are too low, then you would expect people to want to exchange their CNY for USD, since why not put it in dollars if it doesn't cost you much. Again, hence capital controls to protect against capital flight. Macro folks call it the 'trilemma' and we're seeing a real time experiment in it, on a massive scale, right here. https://www.investopedia.com/terms/t/trilemma.asp https://www.investopedia.com/terms/t/trilemma.asp

hn_throwaway_99 7y ago
The whole first part of your post, though, still doesn't affect someone who owns actual currency, e.g. money in a bank account, as opposed to assets (e.g. shares in a Chinese exporter), which is what I was responding to. If that Chinese TV exporter ends up doing great because of devaluation, that doesn't benefit you if you just have actual yuan.
- benj111 7y ago
  It depends at what level you want to look at it. If the economies doing well your money is more likely to find productive investments, alternatively the central bank could increase interest rates to regulate the economy, both would be good for you personally as well as tending to push rates up. My greater point was that exchange rates tend to be self regulating (in this situation), you'd expect it to return to mean rather than get stuck in a feed back loop. This is China though so I have no idea how much they need to heed economic reality.
- thedudeabides5 7y ago
  Sure, and therein lies the difference in incentives between those with lots of CNY denominated assets (owners, aka the rich) and those who's employment and/or income is more tied directly to the demand conditions faced by exporters (workers, aka the poor). Once the 7 line is crossed, owners are more likely to seek diversification through getting out of CNY and into USD/Gold. Some of that downward pressure on the FX is likely good for demand in China (hence Trump saying they are doing it competitively) but it's also bad for liquidity in China (to the degree people start to price in further devaluations and capital flight kicks up again). That's the balancing act the PBOC is trying to manage. Thusfar they've done a pretty good job balancing, though it remains to be seen how the end game looks.

hn_throwaway_99 7y ago

The whole first part of your post, though, still doesn't affect someone who owns actual currency, e.g. money in a bank account, as opposed to assets (e.g. shares in a Chinese exporter), which is what I was responding to. If that Chinese TV exporter ends up doing great because of devaluation, that doesn't benefit you if you just have actual yuan.

benj111 7y ago
It depends at what level you want to look at it. If the economies doing well your money is more likely to find productive investments, alternatively the central bank could increase interest rates to regulate the economy, both would be good for you personally as well as tending to push rates up. My greater point was that exchange rates tend to be self regulating (in this situation), you'd expect it to return to mean rather than get stuck in a feed back loop. This is China though so I have no idea how much they need to heed economic reality.
thedudeabides5 7y ago
Sure, and therein lies the difference in incentives between those with lots of CNY denominated assets (owners, aka the rich) and those who's employment and/or income is more tied directly to the demand conditions faced by exporters (workers, aka the poor). Once the 7 line is crossed, owners are more likely to seek diversification through getting out of CNY and into USD/Gold. Some of that downward pressure on the FX is likely good for demand in China (hence Trump saying they are doing it competitively) but it's also bad for liquidity in China (to the degree people start to price in further devaluations and capital flight kicks up again). That's the balancing act the PBOC is trying to manage. Thusfar they've done a pretty good job balancing, though it remains to be seen how the end game looks.