In particular, the knowledge that Chinese growth statistics are, at best, opaque and, at worst, misleading.
This has informed views of the reasoning behind the decision to widen the daily fix, with the view that the timing of the move could be indicative of an increasing level of desperation within the government to try and arrest the decline in economic growth, beginning to take precedence over explanations involving China’s stated desire to have its currency included in the IMF’s basket of reserve currencies.
This view is mentioned in the same breath as questions about whether or not this move is the beginning of a more aggressive devaluation as China joins the so-called ‘currency war’ and it is one that has become stronger over the course of Wednesday as the news of a second day of cuts sunk in.
This is important because what then follows are questions about the implications of these moves for Fed policy and the timing of a rate hike there, as the expectation is that further moves by the Chinese would export even more deflation into the global economy.
While there is no way to know exactly what the Chinese government’s intentions are, which is, indeed, one of the criticisms often levelled at the country, it is also important to keep in mind how the market perceives the moves being made.
As Ben Hunt, chief risk officer at Salient Partners pointed out yesterday in his Epsilon Theory blog, while there is no way to properly know the ‘Truth’ about Chinese growth or Fed intensions, the Common Knowledge, or as he puts it, “what everyone thinks that everyone thinks about Chinese growth” has been dramatically worsened by the falls in the yuan over the past two days.
“Initial media efforts to portray the devaluation as a one-time “adjustment” that’s in-line with prior policy have been overrun by stories of “shock” and disjuncture.
“Moreover,” he added, “the devaluation is not being described in Western media as Chinese “stimulus”, which it surely is and would send markets higher if portrayed in this light, but as Chinese “currency competition” and as a sign that the growth problems in China are more severe than Western central bankers would like to believe.”
And, he adds, it is a change that will accelerate unless this narrative shifts.
