The Chinese Devaluation Continues

Just today, as US inflation came in a touch hotter than expected, the Chinese Yuan is pulling lower, testing the lows of May 9, 2022. The five-day rate of change is fairly extreme by anything we’ve seen over the last few years. The last time we experienced a weekly 3% drawdown was in 2015 as China was attempting to stimulate its economy.

The total devaluation so far is about 7%, which is roughly half of the 2015/16 and 2018-20 devaluations. So, there is probably more to go, especially given the relatively wide spread between the onshore (CNY) and offshore (CNH) Yuan. When this spread increases, it is historically indicative of money trying to leave the country.

The devaluations usually have a quick downward impact on prices. For instance, if we look at import prices from China, they track changes in the CNY closely. This suggests that import prices from China have peaked, providing a tailwind for the inflation “peaking” story.