“This action is both an endeavour to make the yuan more plausible, credible candidate to be included in the SDR (special drawing rights) basket, but at the same time there is no doubt that China is responding to its own internal developments of slowing down of growth and exports, in order to give its economy a boost, and all of us policymakers around the world including India have to take notice of its action”, Subramanian said in Delhi.
Advertisement
The rising dollar has hurt U.S. exporters by making their goods costlier overseas, and China’s move to devalue its currency could further complicate the Fed’s decision on when to raise rates. I’ve seen similar statements repeated across the board since China’s move to devalue its currency yesterday and then again this Wednesday.
The People’s Bank of China yesterday devalued the currency against the US dollar by 1.6 percent on after cutting its value by 1.9 percent the day before.
“China is still a big unknown, and the market is pricing in the worst” scenario, said Marc Chandler, global head of currency strategy at Brown Brothers Harriman in New York.
China’s currency fell to a four-year low on Wednesday, slumping for a second day, after a central bank devaluation on Tuesday, and government sources believe the yuan may be allowed to slide even further to help the country’s exporters. The renminbi is the Chinese currency of which the yuan is a basic unit.
Chinese officials say Tuesday’s move will mean the yuan will partly reflect market fluctuations while still remaining linked to the dollar.
The devaluation followed weekend data that showed China’s exports tumbled 8.3 percent in July, hit by weaker demand from Europe, the United States and Japan, and that producer prices were well into their fourth year of deflation. Is the fact that free markets are taking hold in China that has markets a little volatile?
In a note on Wednesday, Richard Iley, chief Asia economist at BNP Paribas SA, said the rupee’s outperformance compared with its Asian peers is likely to continue because India’s trade exposure to China is the lowest in the region and the country has benefited from weaker gold and oil prices recently.
As Council of Foreign Relations President Richard Haass lamented on CNBC this morning the causation for the Chinese currency devaluation is concern for their economy, is the real causation of volatility due to China’s moves to free markets?
Yesterday, China’s central bank fixed the “official midpoint” for the yuan down 1.6 percent to 6.3306 against the dollar. The Shanghai Composite Index fell 1.1 percent to 3,886.32, and shares in Southeast Asia were also lower. The U.S. Treasury is likely modeling currency values and, like a military general, has mapped various probability paths, considering different scenarios particularly with regard to China gaining world reserve currency status.
The devaluation sparked fears of a global “currency war” and accusations that Beijing was unfairly supporting its exporters, but the central bank on Wednesday sought to reassure financial markets that it was not embarking on a steady depreciation.
So again – in theory – the US should have welcomed this move too. “Rather than changing their ways, the Chinese government seems to be doubling down”. China has “ample ammo”, plenty of dry powder to stabilize its economy. Inflation has risen just 1.3 percent in the past 12 months.
Advertisement
China’s move is already having repercussions around the region. The Dow Jones industrial average had been down 277 points earlier Wednesday. But analysts said the move was unlikely to spur competitive devaluations and would have only a modest impact.
