It looks like China is not done devaluing the yuan despite reassurances from top officials at the People’s Bank of China that last month’s currency devaluation is a one-off occurrence.

According to a report from research firm IDEAglobal, China is planning a  massive 15-20% devaluation (not a typo) of its currency by year end 2016. IDEAglobal says the information in the report published late Tuesday comes a “reliably-informed Asian source.”

China made a move to devalue the renminbi / yuan in August to try to help exports as the Middle Kingdom is trying to deal with a weakening economy and shaky financial markets.

China

Statement from IDEAglobal source

The IDEAglobal source noted: “Having achieved a 3 percent move in a few weeks, they would not want to stop here. Their ultimate target is probably a 15 to 20 percent minimum move in the trade-weighted index.”

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Devaluing The Yuan China's Economy

More on China’s plans for yuan devaluation

The report included a question and answer session with the source, who argued Chinese authorities were looking for an additional 6% drop in the yuan by the end of the year and another 10% by year end 2016.

The source argued that the push for a weaker yuan by the PBOC must be viewed in the context of the decline in other Asian currencies such as the Japanese yen that have provided a competitive edge to exporters in those countries.

Analysts point out that the Japanese yen has lost more than half of its value against the dollar over the last three years as the Bank of Japan has been pumping monetary stimulus into its economy as a part of Abenomics.

The decision by China to devalue the yuan a few weeks ago has led to increased worries about a global “currency war”, and any move by China to ratcher the yuan down further would almost certainly lead to serious volatility in global financial markets.

Of note, the yuan was listed at 6.3708 per dollar late Wednesday, after hitting a four year-low of 6.45 after the surprise devaluation in mid-August.

China likely to undertake covert devaluation

IDEAglobal’s source suggested that the Chinese authorities would probably take a more subtle approach to devaluing the renminbi. “Engineering a devaluation of this magnitude will not be easy, especially given market chaos. However, the PBOC has the mechanism to influence the daily fix with covert interventions by networked players to achieve a creeping devaluation and maintain the appearance of it being “market-led”.”

20%?!

Others take issue with the number.

Analysts from KDB Daewoo Securities Research state in a recent report:

We expect the yuan to depreciate by 4% over the next year, as: 1) the Chinese economy remains sluggish; and 2) China’s falling foreign currency reserves would make it difficult to keep its currency strong. The yuan’s depreciation will likely leave the won weak in the medium to long term.

Natixis believes there may be more devaluing but not to the level of 20%

They state:

PBoC is currently facing a dilemma. Exports is unlikely to rebound without a further depreciation of RMB. Yet, a further depreciation would give a heavier burden to Chinese industries with foreign debt exposure, such as the properties and airlines, and more importantly, capital flight is the last thing the Chinese authorities want to see. The offshore market expects a weaker RMB. Going forward, the data on China trade, inflation, investment and properties, which will be released in the coming two weeks, would be important in pointing out the direction of RMB and the PBoC’s policy response.

 

Analysts at Haitong Securities opine:

We calculate RMB equilibrium exchange rate through two methods. 1) Based on the basic PPP (Purchasing Power Parity) theory, the equilibrium exchange rate should be 3.52 RMB/USD. However, the method is most useful for data comparison between countries but meaningless for forecasting market exchange rate. 2) Based on the corrected PPP, the equilibrium exchange rate is 7.22 RMB/USD. Though being 13% higher than the market exchange rate of 6.4 RMB/USD, the rate of 7.22 is not high, because RMB appreciated by 14% from Aug 2014 to Jul 2015 according to the effective exchange rate. The calculation of equilibrium exchange rate seems unreliable, but it is meaningful when the actual rate is very different.

Yuan

China's Yuan Devaluation

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