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Yuan Declined 10% Since February

The Renminbi (yuan) is down 10% since the end of February and is a risk of breaking 7 per dollar.

​Currency Threat

The Wall Street Journal reports China Puts Yuan Skeptics on Notice as Currency Nears Decade Low.

A top Chinese policy maker warned investors to stop betting against the country’s currency Friday, boosting the yuan after it had fallen to nearly its weakest in a decade.

“For forces that try to short renminbi, we fought hand to hand a few years ago, and we are very familiar with each other,” said Pan Gongsheng, a vice governor of the People’s Bank of China, at a briefing on Friday. “I think it’s still fresh in both of our memories.”

The comments from Mr. Pan, who is also the head of the country’s foreign-exchange regulator, were the latest sign that Beijing is growing concerned about its currency again, more than three years after a previous bout of depreciation sparked global market havoc.

China has made it more expensive this year for traders to place bets against the currency and tweaked the mechanism for setting its official daily trading range—efforts aimed at reining in the yuan’s tumble.

After a nearly 7% selloff this year, the yuan is at the brink of hitting 7 per dollar—a closely watched threshold that could trigger further selling if Chinese businesses and individuals decide that means they need to expatriate capital before any further decline. The yuan last traded weaker than 7 per dollar in May 2008 in the onshore market, while offshore trading was only introduced in 2010.

Obvious Bluff

I know an obvious bluff when I see one, and that's an obvious bluff.

Two Problems

1. China needs the yuan to fall to counteract Trump's tariffs
2. China does not want the capital flight that will accompany a sinking yuan

Obvious Solution, Obvious Bluff

Points 1 and 2 are contradictory. The only solution is to let point 1 happen while denying they will let it happen.

Expect Volatile Moves

China will act, at times, to make it appear it will defend the yuan even as it will slowly let it sink.