The Chinese Yuan has fallen precipitously in the last 10 weeks raising concerns of whether China was using the currency as a weapon to preemptively mitigate looming tariffs. A 6% devaluation over the last 10 weeks is a larger move than experienced in 2015/16. The timing and magnitude of the devaluation is suspicious to say the least, coming on the heels of President Trump’s ramping up trade war rhetoric.

In this round of CNY/USD devaluation, there are some differences with the 2015/16 experience. First, there is little evidence that the devaluation has been driven by Chinese citizens trying to get money out of the country. The barometer we use to measure this is the spread between the onshore and offshore Yuan. When residents want to get money out of the country, a spread opens up between the two markets reflecting the acceptance of a discount to cash out. The CNY/CNH spread widened to .10-.15 in September 2015 and January 2016. Currently, the spread is about .03, well within the normal historic range.

Second, in 2015/16 the CNY was falling alongside oil prices. In the September 2015 episode, oil fell almost a third and in the January 2016 episode, oil prices fell almost 50%. This time, oil prices have risen about 20% while the CNY has been falling. All else equal, rising oil prices should be the backdrop for the CNY to rise given that China is a huge oil importer.