Last week, in “Is China Quietly Targeting A 20% Devaluation,” we highlighted a Bloomberg piece which suggested that “some Chinese agencies involved in economic affairs have begun to assume in their research that the yuan will weaken to 7 to the dollar by the end of the year [and to] 8 by the end of 2016.” 

Given China’s, how should we put this, “aggressive persecution” of anyone deemed to be spreading “false” information about the country’s financial markets, it’s quite understandable that Bloomberg’s sources asked to remain anonymous, but even if we don’t know the specifics, targeting a 20% devaluation by the end of 2016 would seem to be consistent with an all-out effort to give the export-driven economy a defibrillator shock, as every 10% devaluation translates roughly to a 10 point boost to export growth. 

We also said the following about why a more dramatic devaluation may indeed be in the cards:

In any event, a more dramatic devaluation may ultimately be necessary not only to boost exports, but to alleviate the necessity of intervening constantly to arrest the yuan’s slide. As BNP’s Mole Hau put it in a note out Monday, “what appears to have happened is that, whereas the daily fix was previously used to fix the spot rate, the PBoC now seemingly fixes the spot rate to determine the daily fix, [thus] the role of the market in determining the exchange rate has, if anything, been reduced in the short term.” Which explains why the FX reserve drain may well be continuing unabated causing the massive liquidity crunch that’s forced the PBoC to inject hundreds of billions of liquidity via reverse repos and ultimately forced today’s RRR cut.  

Needless to say, China’s devaluation and subsequent effort to stabilize the yuan have had a dramatic impact on global markets and a deeper devaluation would likely be accompanied by similarly dramatic adjustments. For their part, BofAML says a devaluation to 8 would send commodities down another 25%, deepening an already horrendous slump and send further shockwaves through the global banking system.