CHINA DEVALUES YUAN TO TACKLE ECONOMIC SLOWDOWN
August 13, 2015
China (again) surprised the world with a surprise currency devaluation. Although seen by many as an acceptable move to save flagging exports, the devaluation has raised concerns over China’s already weakened economy.
China’s central bank, the People’s Bank of China (PBOC), announced the reference rate of the yuan against the U.S. dollar would be cut by 1.9 percent on Monday, August 10, making it the largest single-day rate adjustment since 1994. As a result, the exchange rate of the yuan against the dollar dropped from 6.21 yuan per dollar on Monday to 6.32 by the end of Tuesday, the lowest since April 2013.
In the global stock market, the devaluation immediately triggered turmoil. Within two days, the Dow Jones Industrial Average has dropped 1.25 percent, based on numbers from midsession on Wednesday. At the same time, all major stock markets in Asia and Europe have experienced a significant slide, as Hong Kong’s Hang Seng Index fell 2.4 percent, Japan’s Nikkei 225 index dropped 1.6 percent and Germany’s DAX index fell 3.3 percent. In particular, luxury brands and mining companies suffered the heaviest, with British luxury goods firm Burberry and France-based Louis Vuitton falling 3.5 percent and 5.5 percent respectively, according to the Wall Street Journal.
The PBOC explained the move to devalue the yuan as a fix to “improve its central parity system to better reflect market development in the exchange rate of the Chinese currency the yuan against the dollar,” according to Chinese state media Xinhua. It said that the yuan has appreciated too fast “by a large extent and for a long duration” and that the current reference rate no longer matched the actual market rate.
“The shift is a one-off technical correction and should not be interpreted as an indicator of future depreciation,” said PBOC chief economist Ma Jun. Ma also said the decision on Monday was a one-time adjustment that will not entail future devaluation.
Analysts agree that keeping the yuan weak will stimulate exports and boost economic growth in the short term, but most of them say the bonus will gradually fade out in the long run. Nicolas Lardy from the Peterson Institute for International Economics said the 2 percent devaluation alone is not enough to alter the slowing Chinese economy. Zhu Chaoping, an economist from a Singapore-based investment bank, said the intervention will only jeopardize the Chinese authorities’ credibility. “With all the efforts to make the economy more market-oriented, the government is introducing more risks into its financial system,” he said.
Official data released last weekend indicates China’s economic growth was weaker than expected. In July, exports dropped 8.3 percent due to weak demands from consumers in the Europe and the U.S. Meanwhile, capital outflows were exacerbated by the catastrophic stock market crash and uncertainties over the Fed interest rate hike.
Unlike other major economies, China still sets restrictions on the trading of the yuan in international markets. However, since 2009, China has moved towards further internationalization of the yuan and increasing flexibility of its exchange rate, both of which were welcomed by the U.S and European Union.
China is pursuing the inclusion of the yuan in the IMF’s special drawing rights, a basket of benchmark international currencies, this December. Larry Hu, an economist at Australian investment bank Macquarie Group, described the devaluation as a strategy that hits two birds with one stone. “It caused the yuan to weaken, ending support to exports, and it’s making the exchange rate more market-determined, which could help China win the reserve currency status,” he said.
Regardless of its real intention, Beijing’s move has already outraged some lawmakers from both parties in Washington, who condemn the devaluation as “a grab for an unfair export advantage,” according to Reuters. However, the U.S. Treasury Department said it was still too early to evaluate the implications of China’s move to devaluate the yuan, although it has warned China that “reversal in reforms would be troubling.”
However, the devaluation could be a good news to millions of U.S. consumers. The prices of gas and commodities are expected to drop soon as the price of crude oil already had already fell to six-year low on Tuesday. Once again, the devaluation reminds us of how well-connected the global economy is.
For more information on this topic, please visit the following links:
Wall Street Journal – “China Moves to Devalue Yuan“;
ThinkAdvisor – “China’s Confusing Currency Devaluation Means Get ‘Buy Lists’ Ready”
For Chinese language news on this topic, see the sources below:
新浪财经 – “人民币贬值“几家欢喜几家愁” 谁是此次风暴的赢家和输家？”
FT – “FT社评：中国贬值人民币意在自保”
Compiled and edited by Junxiao Liang.