Minorly, because tomorrow's price might be lower. Majorly, because even taking into account the price drop, the present value of the currency-swapped yield on investments in a foreign currency are greater than those prospects at home.
That is an economic argument over something that seems to be a political valuation though.
That doesn't make sense. Holding a currency that gets devalued (and you believe it will be devalued further in the future) doesn't benefit from an improvement in the underlying economy. I.e. if I own 100 yuan, which buys about 14.25 dollars, if the currency is devalued so that in one year it only buys 10 dollars, even if that devaluation caused Chinese exporters to do great, I still would have done much better if I switched over to dollars originally. Currency doesn't pay a dividend.
Yesterday people in America were buying TV's from people in China. Let's say the price of a given TV was $140.
Now that the CNY/CNH is 'lower' (in the sense that you now need more than 7 CNH to buy $1), the price of those TVs just fell.
Now maybe the price of the TV's at $140 was in some contract, but the next time the contract comes up for review, the lower CNY reflects the fact that someone in China will accept 'less' for their TV than they were yesterday.
Extend this logic from a 1% move to a 20%.
As prices fall, maybe people start buying more of their TVs from China than South Korea, cause relative to the price of TVs from SK, the Chinese TVs are now a 20% discount.
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Now, whether a falling FX makes for greater or lesser demand for Chinese financial assets, that's a different story. Would expect this to prompt capital flight.
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And finally, yes, currency does pay a dividend. Just usually in the form of a different interest rate. So for 'lending' to a developing currency (in the form of buying a financial instrument or holding a bank account), you generally earn the local interest rate.
When capital deems that country as more risky, then that is reflected in the yield of short term interest rates. Were you to lend to Brazil, you might want 1,2 or even 5% more than you get for lending to JP Morgan or the US Govt.
Now, the fact that this 'interest rate spread' doesn't really exist vis-a-vis China, well that's the whole issue at stake. If interest rates in China are too low, then you would expect people to want to exchange their CNY for USD, since why not put it in dollars if it doesn't cost you much. Again, hence capital controls to protect against capital flight.
Macro folks call it the 'trilemma' and we're seeing a real time experiment in it, on a massive scale, right here.
My greater point was that exchange rates tend to be self regulating (in this situation), you'd expect it to return to mean rather than get stuck in a feed back loop. This is China though so I have no idea how much they need to heed economic reality.
Once the 7 line is crossed, owners are more likely to seek diversification through getting out of CNY and into USD/Gold.
Some of that downward pressure on the FX is likely good for demand in China (hence Trump saying they are doing it competitively) but it's also bad for liquidity in China (to the degree people start to price in further devaluations and capital flight kicks up again).
That's the balancing act the PBOC is trying to manage.
Thusfar they've done a pretty good job balancing, though it remains to be seen how the end game looks.
I don't understand your second point. Perhaps you could give a simple illustration?
Also 'all else being same' assumptions are just an explanatory tools for showing effect of basic economic principles (like supply/demand) within economy, not something to be taken too rigidly. There's no such thing as 'all else being same' in reality.
Not necessarily. The decision of individuals to allocate in a particular manner can be thought of as a continuous function (IIRC this is called an indifference curve). In this case, the individual’s preferences (given by this curve) remain constant. As the relative prices of goods (currency being one) adjust, the composition of the preferred basket also adjusts. This is consistent with ceteris paribus. If an individual’s preferences were assumed to change, then the assumption would be violated.
> A devaluation today doesn't on its own provide information about future moves.
In general terms, people cite ‘momentum’ as a trading factor. A change in price today may continue tomorrow. If you consider the feedback loops that occur as something appreciates or depreciates, it may explain why momentum can be observed.
In more concrete terms, China has very deliberately kept its currency from devaluing below this level against the dollar for quite some time. The country has attempted to undermine short positions against the currency by doing things like adjusting fixings and overnight rates massively against the shorts for a brief period. Given that China is now allowing this devaluation to occur, it signals that the nation has a new exchange target in mind, presumably lower than the previous one.