Another Twist in China's Continuing Devaluation: Yuan Basket

China has announced another surprising move in its efforts to further decouple from the US Dollar peg and let the yuan to continue to float more freely. The PBOC announced on Friday that it would value the yuan by tracking it against a broad range of currencies while bring the dollar's weighting down.  There have been no specific details on how this will be implemented. According to Bloomberg: 

""The new yuan index will be composed of 13 currencies "to help bring about a shift in how the public and the market observe RMB exchange rate movements,"" CFETS said in a statement released late Friday."


Below is a chart of the currency weightings in the China Foreign Trade Exchange System (CFETS) Index.

This is happening as the Fed meetings begin today and an interest rate rise is expected for the first time in nearly a decade.  It appears China is afraid of a strong US dollar because that would be a form of monetary tightening at a time when China is implementing monetary stimulus to try and strengthen its extremely weak economy.  

Yuan Continues to be Overvalued

The chart below shows how overvalued the yuan is versus other emerging market economies. The chart clearly shows the yuan needs to continue devaluing to come to a proper value.  As mentioned in the last blog post, this could be up to 20% vs USD which would be much more in terms of the currencies on the chart below.

As the PBOC continues to devalue the spread between onshore yuan and offshore yuan continues to widen and this as has been mentioned is bitcoin positive. 

As the yuan continues to devalue and more and more wealthy Chinese move money offshore at a time when strict capital controls are starting be enforced, bitcoin is becoming a bigger way to get money out of the mainland. If more Chinese wake up to this reality, the price of bitcoin will continue moving higher.