How low will the yuan go?

As the yuan dips further below six-year lows against the dollar, it's worth asking how low it will go, and what constitutes a reasonable floor.

The fact that even the heavily restricted onshore RMB is already pushing 6.75 (closed 6.7449 today) indicates that Beijing has convinced the world that it has enough control of the currency to prevent a speculative rout. But with so much uncertainty looming over the global economy, especially what with the rise of nationalist populism in the West that's fueling an unprecedented rich-world backlash against trade, it's seemingly at the mercy of forces beyond its control. So even though it's actually helped China that the West is increasingly exposed as actually the weaker link in the global economy, the cover that this gives it to weaken the yuan won't last much longer until concerns over its own health come back to the fore.

Back on July 2, 2015 in Beijing, during my last trip to China, I asked my uncle, a mainland steel trader, what the yuan would go to if it were allowed to free-float. This was the week before the worst of the summer stock market crash, and the yuan was sitting at 6.21 to the dollar - propped up, as I later learned, by heavy selling of forex reserves by PBOC. He told me that it would go down by about 10 percent, putting it at 6.90 to the dollar.

Sure enough, less than six weeks later China stunned the world by devaluing nearly 2 percent one-off on August 11, in the first of several waves of reset that have now seen the yuan shave about 8 percent against the greenback. In other words, we're mostly there: another 2 percent depreciation perhaps, and we'll be at the floor as perceived by someone intimately familiar with Chinese markets and economic conditions.

Beyond this, it's highly tempting for Beijing to devalue even further should weakness persist in Europe and the UK (i.e. Brexit), and even more so if Japan buckles under pressure and starts devaluing the yen at last, while the Fed still dawdles over its determination to normalize interest rates in this unusually prolonged hike cycle. The drawback to further currency softness, though, will be quite obvious: it sends the wrong signal about commitment to transition the Chinese economy from exports to domestic consumption, even as it raises more hackles with trade partners about not cutting them much-needed slack.

So for the time being, as Western uncertainties about trade and globalization more broadly are worked out, China must strive to pull some more weight as is now widely expected and demanded of it. It must draw some line in the sand that it won't cross regardless of how hairy things get with further easing or bailouts especially in Europe and the UK; it must also hold its ground as the Fed likely bargains with the new US administration and Congress to raise rates at an acceptable clip on the condition that the latter enact more aggressive fiscal support and preferably targeted deregulation of the most choked-up or clogged sectors.

Ideally, the yuan shouldn't have to decline to 7.0 or even 6.90, but will decisively stabilize around the 6.80 level from which it subsequently strengthened in the resounding recovery from the financial crisis. Then, as back in the 2011-13 appreciation period, it should claw its way back up beginning in late 2018 or early 2019, as the "L-shaped recovery" is completed, to return to the mid- and eventually low-6's; by the end of Xi Jinping's second term in 2022, it should be stable in the 6.05-6.25 range at which it hovered in 2014-15, before breaking in the August 2015 devaluation.

This won't sit well with certain committed neoliberal ideologues who insist that China fully subject its currency to "market forces", as if the West still actually plays by such "market forces" itself. But such voices are the ones now finally being rejected and discredited despite having brayed the same old spiel for so long. If Beijing continues to exercise discipline against its own corruption and resolve in the face of those with a vested interest in its failure, a China-friendly - even to some degree China-centric - new global financial architecture is likely to emerge early next decade.