Low-key yuan devaluation proceeding apace

The canary in the coalmine for the apparently stabilized yuan is that offshore RMB deposits have significantly shrunk in 2016 YTD, indicating a low confidence that the currency has bottomed.

Though the yuan's share of international usage according to SWIFT has recently rebounded, at less than 2 percent it remains well below the high of about 3 percent it reached before last year's devaluation.

Recently, the yuan has firmed up somewhat against the dollar, but only by weakening to all-time lows against the alternate 13-currency basket used by CFETS since December. This convenient duality of quasi-pegs has allowed PBOC to avoid tightening monetary conditions in times of RMB strength against the greenback, even as it's also given an effective global cover for further weakness against it. The result has been a substantial roughly 7 percent depreciation against both the dollar and the broader basket - dominated by the other crucial tenders of euro, yen, and sterling - without driving global markets over a cliff, as appeared to be imminent last August and January. Few who understand this mechanism are failing to be gradually impressed by its efficacy and cleverness.

PBOC is thus apparently achieving its goal: engineering a gradual, low-key devaluation of the yuan without triggering undue domestic and international uncertainty over the Chinese financial system and real economy. This has bought time and altitude for the communist authorities in Beijing to attempt the gradual surgical restructuring of the latter, as if a plunging plane with sputtering engines has gotten just enough of a jolt from firing them again, steadying it to a level descent, with sufficient airspeed, that enables it to stay airborne long enough to reach a suitable runway.

PBOC Governor Zhou Xiaochuan is the unsung star of the global economy, and will be much sought after at the coming G-20 in Hangzhou: his prominence in Chinese policy not only reassures the world of Xi Jinping's commitment to reform, but more broadly bolsters global confidence in central banks and bankers as a whole.