US Markets

China policymakers may lose control of yuan: Trader

A customer holds a 100 Yuan note at a market in Beijing.
Jason Lee | Reuters

China may be just one disappointing economic report away from losing control of its currency devaluation, BK Asset Management's Boris Schlossberg said Friday.

On Thursday, the People's Bank of China said it would not allow the yuan to plunge 10 percent as some fear it might.

But Schlossberg said policymakers typically overestimate how much control they have when they allow the markets to play a bigger role in determining currency value, as China did on Tuesday.

"What happens when the bad news comes out? The next GDP print let's say misses and the market really tries to push the yuan lower. Will the Chinese government simply let the yuan float or will they come back and try to put the genie back in the bottle?" he asked during an interview on CNBC's "Squawk Box."

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Schlossberg acknowledged that the move was necessary in the face of monetary easing and currency weakness around the world, and that China has ample foreign reserves to fend off trading pressure. But he said China still risks overshooting its target.

"It could create inflation, destabilization in the equity markets, all sorts of other things," he said.

China's held steady against the dollar on Friday but posted its biggest weekly loss on record due to the central bank's surprise move to devalue its currency.

The yuan fell for three consecutive days and had repeatedly touched fresh four-year lows since Tuesday, when the central bank devalued the currency by nearly 2 percent.

China's currency strategy has been seen as two pronged. Market watchers have speculated the PBOC devalued the yuan to make Chinese-made goods cheaper for foreign buyers at a time when its exports have weakened.

Chinese exports tumbled 8.3 percent in July, their biggest drop in four months and far worse than expected.

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But China also wants to establish the yuan as a reserve currency. Bodies such as the International Monetary Fund have said the country must first allow market forces to more directly determine the yuan's value.

Schlossberg said the Chinese economy is in serious trouble, and the currency devaluation is a direct response: "This is a reactive move, not a proactive move."

Jeff Saut, chief investment strategist at Raymond James, said he doesn't believe the speculation that's been swirling for years that China is about to blow up. Instead, he thinks China is following in Brazil's footsteps in transitioning to a consumer-led economy.

Brazil figured out that "a manufacturing and export driven economy is not sustainable in the long run. You needed to create domestic demand, and so they raised interest rates. That strengthened their currency. The economy slowed but it didn't stop," he told "Squawk Box."

The currency move is not a devaluation but part of an effort to become a major player in the financial world, Saut said.

—Reuters contributed to this story.