“What’s happening in China is they have to have dollars to sell to buy their own currency to hold it up. If they were to ever free float their currency, I think it would drop 30% or 40%. And the reason is they claim to be 15% of global GDP in dollar terms, but less than 1% of global transactions settled in their own currency. And so, they prop their currency up...everyone calling them a currency manipulator – they are trying to hold this whole thing together.”
Today's tiny adjustment to the exchange rate caused a 30% spike in the VIX (measure of market volatility) and a 767 point decline in the DJIA. If China ran out of ammo to support its currency causing a decline of 30-40% (as Kyle Bass suggests), global markets would plummet. The global economy could soon follow.
Despite the headlines, the Sino-US trade war may not be the primary motivation behind today's devaluation. China may actually be running out of reserves to support its currency, forcing it to gradually devalue its currency. Today's 767 point market decline could be the best of a bad situation (compared to a forced, sudden unwind of the currency peg), but it could also be part of a longer process of devaluation. Kyle provides more detailed analysis along these lines in the second video below.