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The Knock-On Effects Of A Deleveraging China

Over the last two decades China has been following the Gerschenkron Growth Model to deliver high levels of extended economic growth.

The Gerschenkron model of growth goes like this:

  • Undeveloped countries are plagued by poor infrastructure and have low savings and investment rates.
  • To increase investment and boost development, they lower the household’s share of GDP thus increasing governments and producers share of GDP. This in effect raises the nation’s savings rate, providing more money to invest.
  • This investment is then directed by government into big infrastructure projects and export focused industries.
  • The country then grows by increasing its market share of global exports and investing in high return projects.
  • Eventually the country maxes out the amount of productive investment it can absorb. This results in each new unit of debt having less and less of a positive economic effect.
  • The vested interests who became rich and powerful on the back of the investment led economy aren’t incentivized to rebalance. So they keep adding unproductive debt until, eventually, debt servicing costs exceed the economy’s capacity to service it and the economy inevitably goes through a painful forced or managed rebalancing.

China is now at this last step.

China has to rebalance its economy. It needs to transition from an investment and export led economy to a consumption based one; retransfer wealth from the vested interests in local government and private businesses back to households. In addition, it needs to deleverage by paying down, writing off, or inflating away its debt stock.

The quickest way to resolve a debt problem like this and rebalance an economy is to go through a financial crisis where assets are sold and debt written down. This is what the US did in the 1930s. But China can’t go this route because this path involves high levels of unemployment that bear socio-political risks, which the CCP can’t afford.

A much more likely scenario (which I believe we’re beginning to see now) is one where the CCP takes a gradual and pragmatic approach.

They assign the debt servicing costs to local governments, who are then forced to sell assets in an orderly manner to pay down debt. And then the CCP goes after debt in the most vulnerable areas of the economy, primarily the off-balance sheet / shadow banking sector and P2P lending, while balancing this with leveraging in the visible areas parts of the economy (ie, local government issuing bonds to boost specific investment).

This approach means that we shouldn’t expect a hard landing or financial crisis. It’s likely to look much more like Japan’s lost decade, though China has made it very clear in recent months that they won’t make the same mistake the Japanese did and let their currency strengthen too much. So we should expect the yuan to continue slowly devalue against the dollar.

When I share this China bear thesis with people I almost invariably get the question “Why now? What’s keeping them from kicking the can down the road, again?”

That’s a fair question. Chinese leaders have publicly stated as long ago as 2006 that the country had a serious debt problem and that they’d work to deleverage. Only to obviously do the opposite.

But there’s been a very important change over the last year that makes this time different. And that’s the centralization of power.

Only two types of government have been able to handle and survive a difficult economic and debt rebalancing like this (1) robust democracies with strong institutions (like the US in the 30s) or (2) strong centralized authoritarian regimes (like China in the 80s).

This is what the whole anti-corruption campaign and last year’s 19th Party Congress where Xi became de facto emperor, are all about: Xi consolidating power.

Many people have the misconception that the Chinese government is a well oiled machine, where word is past from on top and carried out at the bottom. But in practice this isn’t the case at all.

The real power and control over debt fueled spending has rested with the vested interests at the local government level; from the provincial on down.

There are two Chinese idioms that relate how things actually work, one is ‘heaven is high and the emperor is far away’ and ‘from above there is policy, but from below there are countermeasures’. Meaning, local government officials are free to do as they please, even if it goes against Beijing’s wishes.

This is why over the last decade we’ve seen leaders in Beijing come out talking about the dire need to rein in the country’s debt but local leaders continuing to borrow, spend, and build.

The vested interests who have become rich and powerful are reluctant to stop the activities that made them so.

The anti-corruption campaign that has punished or jailed over 1.5 million party members since 2012 has been effective in clamping down on dissidence. Xi now has the control and authority to carry out Beijing’s wishes.

The SCMP reported last week that updated party rules “state that failing to implement policies from the top is now officially a breach of discipline that can see cadres lose their jobs or even be expelled from the party. Those who refuse to implement policy directives from the party’s Central Committee, who run their own agenda, or ‘are not resolute enough, cut corners or make accommodations’ in applying them, will be subject to punishment under the new rules, which took effect on August 18.”

That’s why this time IS different

President Xi clearly stated his intentions in 2016, saying “If we don’t structurally transform the economy and instead just stimulate it to generate short-term growth, then we’re taking our future… If we continue to hesitate and wait, we will not only lose this precious window of opportunity, but we will deplete the resources we’ve built up since the start of the reform era.” He finished by stating that the country had until the end of 2020 to make this transition.

Another common objection I hear is, “they’re not deleveraging, they’re easing!” But this isn’t so. This misunderstanding is partly due to a failure to view the data holistically as well as intentional misdirection by the Chinese in order to manage the market’s response.

A recent paper by the Paulson Institute (the Macro Polo blog) helps clarify the recent words and actions out of Beijing. Here’s some highlights from the report with emphasis by me.

Upon a cursory look, the message from the Politburo meeting seems contradictory, emphasizing both deleveraging and growth. But this can be reconciled by clarifying just exactly what Beijing means by “deleveraging” in the current context.

Top policymakers are well aware that they’ve gotten a lot of flak from businesses and investors, as well as local governments, for tightening policies that have dried up credit. The complaints have grown since the beginning of 2018, so the Politburo meeting’s emphasis on deleveraging is meant to signal that amid grumbling among the masses, the central government is holding the line. In other words, Beijing isn’t going to do what’s popular—opening up the credit spigot again—but rather doing what it deems necessary for China’s economic stability. Indeed, the July Politburo meeting readout notably included Beijing’s renewed vow to uphold deleveraging, which was not included in both the April Politburo meeting readout and the December 2017 Central Economic Work Conference.

Even though the emphasis on deleveraging remains fixed, the central government appears ready to tweak its approach around the edges. Based on the readout of the latest State Council Financial Stability Commission meeting, deleveraging in 2H2018 and beyond will be targeted rather than across the board. At least for the time being, deleveraging has been tweaked to mean “structural deleveraging.”

What this means in the second half is that deleveraging will mostly rely on administrative measures targeted at state-owned enterprises (SOEs) and local governments. Meanwhile, the existing financial measures will remain but will not be further tightened, and monetary policy will become more accommodative and be more in line with inflation trends. In other words, Beijing is simply moving from its triple threat on tightening to just a “double” threat.

A more accommodative monetary policy does not necessarily mean that credit growth will increase. In fact, credit growth will likely remain subdued because of the continued clampdown on shadow banking. Even in the absence of additional regulations, the shadow banking sector will continue to shrink in size under the existing policy environment. If Chinese banks remain reluctant to lend to high-risk borrowers, then the disappearance of shadow banking won’t be offset by increased lending through formal channels.

You can find the report here, it’s worth reading in its entirety.

China is deleveraging and we should expect this deleveraging campaign to gain momentum over the next two years. The current trade war with the US gives the CCP even greater political cover in carrying out painful reforms as it gives them an easy scapegoat to assign blame.

Why this matters

The knock-on effects of a deleveraging China will be numerous and far reaching. The increased market volatility, the bear market in EM, the collapse in gold, and the rise of the dollar are all just the start of things to come. There’s no doubt that it’s long and slow deleveraging will be felt everywhere.

And one thing I find interesting is that this is all starting just as the market’s become blind to the China slowdown threat after fretting about it for years. The chart below via BofAML shows that the China tail risk is hasn’t been front and center on investor’s minds in nearly 4 years.

Practically speaking, we should expect EM to continue a slow and grinding descent lower — again, we shouldn’t expect any quick crashes, as global liquidity remains relatively robust. It’s likely that the EEM breakout of last year was just a massive bull trap. Price should continue lower back into its consolidation zone from here.

China’s largest trading partners (shown on the chart below via Atradius) are some of the most exposed to a Chinese deleveraging.

 

 

The Gerschenkron Growth Model

The following is an excerpt from our Macro Intelligence Report (MIR). If you’d like to learn more about the MIR, click here.

On November 18, 1956, during a reception at the Polish embassy in Moscow. Soviet Premier Nikita Khrushchev declared to his audience of Western diplomats that “We [the Soviet Union] will bury you.” This was not a military threat but rather an economic boast. And it was a remark taken very seriously by the West.

The Soviet economy delivered exceptionally high growth rates in the decades following WWII, far outpacing developed Western nations. This growth mesmerized Western academics, policymakers, and intellectuals with its astonishing pace. The Soviet Union was hailed as an “economic miracle” and many became convinced that the Soviet’s Command and Control economy was far superior to the West’s capitalist system… and that it was only a matter of time before the Soviets became the largest economic power in the world.

This was not a fringe belief. In fact, it was the mainstream narrative and accepted as a matter of certainty. Acemoglu and Robinson relate in their book Why Nations Fail, that:

The most widely used university textbook in economics, written by Nobel-prize winner Paul Samuelson, repeatedly predicted the coming economic dominance of the Soviet Union. In the 1961 edition, Samuelson predicted that the Soviet national income would overtake that of the United States possibly by 1984, but probably by 1997. In the 1980 edition there was little change in the analysis, though the two dates were delayed to 2002 and 2012.

Unfortunately for Samuelson, his prediction somewhat missed the mark. Not only did the Soviet Union fail to surpass the US in economic supremacy, it actually went bankrupt (twice!) in the following decades before finally disintegrating as a geopolitical power.  

But in the 70s, while the Soviet economy was beginning its slow descent into irrelevance, another “high growth” country took center stage, quickly becoming Western economist’s new infatuation: Japan.

Japan’s period of high growth lasted nearly three decades. And because of this economic prowess, Japan was also called an “economic miracle”. Economist, politicians, and intellectuals wrote many a books and thought pieces on the superiority of the Japanese economy to that of the laissez faire capitalist system of the West. And once again it became accepted as a matter of fact that the Japanese economy would soon surpass the US in size.

Here’s some excerpts from a NYT article printed in 1991 titled Leaders Come and Go, But the Japanese Boom Seems to Last Forever, that gives you a good sense of what the common narrative of the time was.

At a time when the American economy is struggling with recession, the Japanese economy has just completed its 58th month of uninterrupted growth.

Setting the new record may not have been an occasion for parades or speeches, but economists are calling this one of the greatest booms in recent history, a period that has not only fundamentally altered the Japanese economy but sown the seeds of even greater friction with the United States. Some have taken to calling this period Japan’s second economic miracle, as important as the one that turned a war-devastated nation into an industrial powerhouse.

Japan is a different country today than it was five years ago,” said Kenneth Courtis, senior economist with Deutsche Bank in Tokyo. “It will become even more evident in the 1990’s. The Japanese economy has so much momentum that, competitively speaking, the 1990’s will be over in 1995. The West won’t be able to catch them after that.” As Mr. Courtis put it, Japan has grown economically by the equivalent of one France since 1985, or by one South Korea each year. Its manufacturers invest more every year in new plants, equipment and research than American companies, though the American economy is some 40 percent larger than Japan’s.

This is the change that is likely to make Japan an even more threatening competitor for American companies, many of which used the immense wealth created in the 1980’s to benefit their investment bankers rather than investing aggressively in the future. Japanese companies are expected to increase their capital investment budgets this year… Mr. Courtis estimated that Japanese companies spent about $625 billion on such investments over the last five years, a sum it will take American companies nearly 10 years to spend.

Of course, we know now that “competitively speaking, the 1990’s” didn’t end in 1995… as senior economist Kenneth Courtis so confidently predicted. Instead, 1991 (when this article was printed) marked the peak of the Japanese miracle economy. What followed was the popping of a gargantuan asset bubble followed by decades of painful deflationary economic contraction.

Richard Koo, wrote in his book, The Holy Grail of Macroeconomics: Lessons From Japan’s Great Recession, that falling land and stock prices alone, accounted for the destruction of 1,500 trillion yen in wealth; a figure equal to the entire nation’s stock of personal financial assets or 3-years of GDP. This makes it the greatest economic loss ever in history by a nation in peacetime.

So much for miracles…

Do the economic miracles turned nightmares of Russia and Japan remind you of any similar majority consensus today? Hmmm?

It should, and for good reason. China is following the exact growth model used by both 1960s Russia and 1980s Japan. It’s called the Gerschenkron growth model and China has implemented it to a T, differing only in its intensity and scale which is unprecedented.

And like Japan and Russia before it, China’s economic “miracle” is anything but.

The China deleveraging is going to be the most important macro driver of markets in the years ahead. Emerging markets, commodities, precious metals, the dollar… all be affected by it. Understanding this thematic will help you better understand market moves as a whole. This is what we’re focused on and will be covering extensively in the months ahead.

The above is an excerpt from our Macro Intelligence Report (MIR). If you’d like to learn more about the MIR, click here.

 

 

The ONE Thing…China’s slowdown and the rough road ahead for EM

I think this is one of the more interesting charts in markets right now. It’s a monthly of the MSCI Emerging Market Index (EEM). The chart shows EEM breaking out to the upside of a 10-year wedge last year before reversing back down and testing the upper line of support. It’s down approximately 12% on the year.

The big question is whether this retest offers an excellent risk-to-reward buying opportunity or if this is the start of a larger downward trend.

I believe it’s the latter. Here’s why…

The selloff has widened the US/EM valuation gap, making EM stocks very attractive on a purely relative valuation basis (chart via Topdown Charts).

This notable valuation gap has spawned the popular market narrative that buying the EM dip is the ‘prudent’ to thing to do. Here’s some financial headlines from over the last few months.

This narrative has led to a large amount of capital flowing back into EM following the 2015/16 China scare (chart via IIF).

And here’s the big tell… Capital flowed out of EM from 14’ to 16’ as China was trying to slow its debt growth. That capital then came rushing back into EM as China injected massive amounts of liquidity into its economy in early 2016.

Looking at China’s fixed asset investment (FAI) by state owned enterprises (SOEs) provides a good measure of their fiscal policy, as SOEs are their preferred channel for juicing economic growth by building more high speed rail, bridges, and even entire cities.

You can clearly see the instances where China opened the FAI spigots (orange line) in 09’, 13’, and 16’. Following each of these instances, investment flows came pouring back into emerging markets.

There are two reasons for this (1) China is a large economy and comprises roughly a third of the MSCI EM index and (2) China has become such a large source of global commodity demand that when it slows its leveraging (ie, reduces its frenetic pace of building) that drop off in demand reverberates throughout the rest of the world, hitting EM growth particularly hard.

The graph below via KoyFin shows how Asian, and in particular Chinese stocks, dominate the top 10 weighted holdings of the index.

Knowing how important China is to the wellbeing of EM, it should be concerning that its preferred method of adjusting demand has collapsed from 23.5% yoy growth last year to just 1.5% growth today — its lowest level in 15-years.

This slowdown in China’s leveraging — we can’t call it a deleveraging yet because it appears their rate of debt growth is just stalling and not reversing yet — is largely what’s behind the diverging economic growth projections for the US and EM.

While everybody is focused on the Fed raising interest rates and quantitative tightening— an important variable because of its effect on the USD exchange rate — hardly anyone is talking about the potential impact of a critical drop in Chinese growth and demand.

This is probably because (1) The China bear argument suffers from “Chicken Little” syndrome. People have been calling for China to implode for nearly two decades now and yet the country has managed to keep trucking along and (2) Everyone assumes that China will just keep mainlining credit at each hint of economic instability.

But there’s increasing evidence that things are different this time around. That, in fact, Xi and the CCP are committed to fixing the imbalances in their economy and stomaching the necessary pain that goes along with doing so.

If we’re correct, this will have critical second and third order impacts on the rest of the world.

Hedge fund manager, Dan Loeb, once said that “A key rule in investing is that you don’t necessarily need to understand a lot of different things at any given time, but you need to understand the one thing that really matters.”

China is that one thing that really matters now in global markets….

This month we’re kicking off what will be a three part Macro Intelligence Report (MIR) series where we’ll dive into the investing implications of a wide scale China slowdown, covering everything from its impact on commodities and precious metals, to currencies, and the housing bubbles in places like Canada and Australia.

In this month’s report we’re going to start off by discussing how China and emerging markets in general have exhausted their easy growth channel of expanding their share of global exports. And then we’re going to dissect how China’s economic “miracle” is no miracle at all but rather the result of a standard cycle in the typical “Gerschenkron model” of economic development; one which has occurred time and time again throughout history and which has always, in every instance, resulted in a large, painful, and prolonged economic crisis.

We’re then going to dive into Chinese policy and share with you the evidence from Xi, the CCP, and underlying data on why we think this time is different, and the signals we need to look for going forward.

Then of course, the trading and investing implications… We’ll layout the case why gold is going to $1,000, oil is going to sub $56bbl, and AUDUSD is going to 0.60.

We’re also going to talk about why we are still bullish US stocks and then pitch two beaten down misunderstood US tech companies that offer extremely attractive asymmetric opportunities to the long side. Finally, we’ll cover a highly contrarian short trade on a popular US listed Chinese tech stock.

If you want the scoop on China be sure to sign up for the MIR at the link below.

Click Here To Learn More About The MIR!

There’s no risk to check it out. We have a 60-day money-back guarantee. If you don’t like what you see, and aren’t able to find good trades from it, then just shoot us an email and we’ll return your money right away.

China’s the most important macro situation to understand right now. Getting it wrong can mean years of subpar returns and underperformance. Don’t get caught on the wrong side of the boat! By reading this month’s MIR, you will be prepared for the worst and positioned to profit off of a full out Chinese collapse.

Click Here To Learn More About The MIR!

 

 

Has The CCP Turned Off The Tightening?

It looks like China may be folding…

We’ve talked all year about how China is THE largest driver of markets this cycle and their deleveraging was the force behind the widening performance gap between the US and the rest of the world.

The continuation of this trend has been dependent on China’s willingness to stay the course and press on with much needed financial and economic reform. A reversal of policy would be seen as a failure and a direct hit to Xi’s credibility.

Cue recent reports indicating the CCP can’t take the heat and has decided to ease once again. Here’s Bloomberg on China’s policy U-turn (emphasis by me).

China unveiled a package of policies to boost domestic demand as trade tensions threaten to worsen the nation’s economic slowdown, sending stocks higher.

From a tax cut aimed at fostering research spending to special bonds for infrastructure investment, the measures announced late Monday following a meeting of the State Council in Beijing are intended to form a more flexible response to “external uncertainties” than had been implied by budget tightening already in place for this year.

Fiscal policy should now be “more proactive” and better coordinated with financial policy, according to the statement — a signal that the finance ministry will step up its contribution to supporting growth alongside the central bank. The People’s Bank of China has cut reserve ratios three times this year and unveiled a range of measures for the private sector and small businesses.

“It is now quite clear that Beijing has fully shifted its policy stance from the original deleveraging towards fiscal stimulus that will be underpinned by monetary and credit easing,” said Lu Ting, chief China economist at Nomura Holdings Inc. in Hong Kong.

China’s State Council plans to raise local government spending by roughly 1.35 trillion yuan (roughly US$200b) to be spent primarily on infrastructure this year.

And the tax cuts aimed at boosting consumer spending are equivalent in size to the tax cuts passed last year in the US — not an insignificant amount.

Why has China decided to backpedal on what was one of Xi’s and the Party’s top stated goals last year?  

It seems there’s increasing fear at the top of losing control of the economy and this fear is being exacerbated by the escalating trade war. Chinese State media recently warned that China’s judiciary should prepare itself for a possible spike in corporate bankruptcy cases as a result of the trade dispute with the US.

The South China Morning Post (SCMP) recently shared the following (emphasis mine):

In an opinion piece published on Wednesday by People’s Court Daily, Du Wanhua, deputy director of an advisory committee to the Supreme People’s Court, said that courts needed to be aware of the potential harm the tariff row could cause.

“It’s hard to predict how this trade war will develop and to what extent,” he said. “But one thing is sure: if the US imposes tariffs on Chinese imports following an order of US$60 billion yuan, US$200 billion yuan, or even US$500 billion, many Chinese companies will go bankrupt.”

As Chinese courts have yet to have any involvement in the trade dispute, the fact that the newspaper of the nation’s top court, ran an opinion piece – for a judiciary-only readership – suggests concerns might be rising in Beijing about the possible socioeconomic implications of the row.

There’s also been a number of reports (so far, unverified) over the last few weeks of serious trouble brewing within the party. Geopolitical Futures recently shared this.

Last Friday, online reports indicated that gunfire had been heard for roughly 40 minutes in Beijing near the Second Ring Road. The reports claimed it was a violent spasm by groups that sought to overthrow Chinese President Xi Jinping. The following day, French public radio reported it had heard rumors that former Chinese leaders, including Jiang Zemin and Hu Jintao, had allied with other disgruntled Chinese officials in an attempt to force Xi to step down. A Hong Kong tabloid went so far as to suggest that Wang Yang, chairman of the Chinese People’s Political Consultative Conference, might be the compromise leader next in line.

It’s impossible for us to know if there’s any truth to these rumors (China keeps a tight lid on these types of things) but just the fact that they’re circulating are indication of growing unease with the state of the Chinese economy. And it may be why we’re seeing this policy 180 by the CCP.

We also don’t know if this easing will be enough to reverse the negative trends kicked into gear by the initial deleveraging nor do we know how long and aggressive the CCP will be in this round of easing. All we know for sure is that however they choose to carry out policy will continue to have an outsized impact on markets and the global economy.

For our part, we just have to keep a close eye on the data and change up our positioning to account for the new uncertainty created by this shift back to easing.

Two important data points we’ll want to watch in order to gauge the scale of the current easing response are fixed asset investment (ie, infrastructure spending) and China’s M1 money supply (which has a close leading correlation to changes in industrial metal pricing).

 

 

the end of apple

What’s Really Driving Apple?

Narratives are a fundamental part of our human existence. They’re the key to how we process information. Just as the mind instinctively searches for visual patterns in nature, it also seeks to derive patterns and meaning from information flow. We create stories to help us understand.

We see this in financial markets all the time, though it’s not always a good thing. You’ve heard the talking heads on CNBC. They hop on camera and try to attribute every little market gyration to one news story or another. This type of narrative creation doesn’t make much sense. Most of the day-to-day movement in the markets is just noise.

But pull back a bit and you can see where narratives become useful. For example, why has gold been on a tear since the beginning of the year? Its narrative revolves around the loss of faith in central banks. Investors have stopped believing in their ability to support and stabilize markets and the currency. And so they turned to gold for safety.  Read more

China’s Deflationary Renminbi Devaluation

The 4 Horsemen Of The Global Deleveraging Apocalypse Part I : China’s Renminbi Devaluation

This is part 1 of our 4-part series on the global deleveraging which is now beginning and is expected to last over the next 2 to 4 years. We anticipate a lot of pain for the global economy in the form of crashing security markets and depression-like economic conditions. This series will cover how we believe this crisis is likely to play out. We will not only help you understand what’s going on, but we will show you how to protect yourself from the coming economic turmoil. We’ll even show you how you can profit from it. Enjoy part 1 below: China’s Renminbi Devaluation.

 

“Declaring war on China’s currency? Ha ha.” That’s the interesting title of a recent article published by the People’s Daily (official newspaper of China’s Communist Party). It serves as a warning to legendary fund manager, George Soros, against shorting the Chinese renminbi. (Side note: China’s currency has two names, the Yuan and Renminbi, they are interchangeable.) Read more

Long Bonds: A Safe Haven In Volatile Markets

Long Bonds: A Safe Haven In Volatile Markets

  • Long dated US treasuries do well in times of market volatility and provide their best returns during bear markets.
  • US debt is viewed as a safe haven when markets are in turmoil and investors flood into them.
  • Recessions are deflationary and inflation expectations plummet. This increases the expected real return on bonds.
  • Lower growth and lower inflation lead to a lower federal funds rate. This rate is transmitted throughout the yield curve and results in lower yields across multiple durations.
  • A potential ease in selling pressure from China will also help propel bonds higher.

Read more

Singapore Can’t Escape The Asian Currency Wars (Long USD/SGD)

  • The yuan devaluation will put upward pressure on USD/SGD.
  • The MAS must react to keep their economy from contracting.
  • Singapore is very vulnerable to currency shifts due to a large import/export market.

Singapore, an economy known for its disciplined monetary and fiscal policy, has managed to get caught in the crossfire of a currency war with no easy way out.

Ever since Abenomics, Asian currency wars have been a dominant theme for macro investors. A currency war begins when one country decides to devalue their currency in order to stimulate export demand. But neighboring countries with stronger currencies have a harder time competing for exports so they begin to devalue as well. What ends up happening is a “race to the bottom” where both countries end up devaluing their currencies into oblivion in order to stay competitive in the global marketplace. Read more

Extremely Important News Just Came Out Of China – Here’s How To Play It

Important market news came out this weekend, and surprisingly (or perhaps not so) it has received little notice. I’m talking about the PBoC’s statement released Friday, signaling that they are looking to break the peg to the dollar and rebalance against a currency basket. Here’s the news, via The Financial Times:

China has paved the way for a further weakening of its currency by announcing changes in how it measures the renminbi’s value.

As markets gear up for next week’s Federal Reserve meeting, the People’s Bank of China signaled it would measure the level of the renminbi (or yuan) against a basket of currencies rather than just the US dollar.

The move, announced on Friday, has raised investors’ alarm at the prospect of a new currency war – just as the US prepares to raise interest rates.

Readers who follow us at Macro Ops knew that this change was coming. Read more