Another 2% Yuan Devaluation Coming Up? What Are the Risks? Explaining Chinese Capital Flight

Jon Blogosphere, Economy

Another Yuan Devaluation Coming Up?
Currency trends suggest another yuan devaluation is coming up. Specifically, the gap between the mainland China yuan (renminbi) to the US dollar, vs. the offshore floating rate of the yuan to the US dollar is now at a record high.
The reason there are two rates is China has tight controls on the range the yuan trades in China, but the yuan floats outside China.
In contrast to previous years where traders bet the value of the yuan would rise vs. the US dollar, traders are increasingly betting China will devalue.
Explaining Chinese Capital Flight
If China had no capital controls, the onshore and offshore rates would have to be identical otherwise there would be an instant guaranteed free money arbitrage opportunity in virtually unlimited size were China to maintain a peg the market did not agree with.

This post was published at Global Economic Analysis on January 06, 2016.