The yuan hadn’t budged much since March as China’s policy makers wanted stability as part of the International Monetary Fund push.
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“It’s not about a minor devaluation“, says Greg McBride, chief financial analyst at Bankrate.com. They can hedge, or insure against unfavorable changes, by signing contracts to buy them at fixed prices on future dates.
With China’s surprise devaluations of the yuan this week sending currencies, from the baht to the Korean won, tumbling across the region, one economic reality is increasingly clear.
Some warned of a looming currency war, others that China was abandoning its commitment to economic restructuring, but others suggested investors may have overreacted.
But he said the PBoC will exercise “effective management” in case of large fluctuations and dismissed rumours that officials had set a target for a 10 percent depreciation in the yuan to spur exports. “It is totally unfounded”, said the official, Yi Gang. It dipped into negative territory to lose about 85 points in midmorning trading after the Chinese central bank devalued the yuan for the third straight day on Thursday.
Shares in Yum! Brands Inc., for instance, have sunk almost 9 percent the past two days, The parent company of KFC and Pizza Hut, it has 6,800 restaurants in China and plans least 700 more this year. “If it does, that will undercut arguments that this is a one-way move to promote exports and manipulate the currency”, said Scott Kennedy, director of Project on Chinese Business and Political Economy at the Center for Strategic and global Studies think tank.
“It’s bearish for the worldwide market because it makes Chinese domestic coal cheaper than everything else and reduces their ability to pay in US dollar terms”, a second trader said.
The Thursday midpoint rate set by the People’s Bank of China (PBOC) – the central bank – was 6.4010 yuan for $1, a 1.1% rise from the previous day’s 6.3306.
Exports in turn rely on the value of our currency, which depends on our trading partners’ currency valuations. The dollar has been very strong over the past year against virtually all global currencies. “By the same token, abating FX volatility on the back of a more gradual yuan adjustment and/or stabilizing macro data outside the U.S. could restore investors’ confidence in the policy divergence trade, boosting the dollar”.
China’s move has sparked fears that a new wave of deflation will wash over the world.
The bond market is saying China’s decision to devalue the yuan won’t stop the Federal Reserve from raising interest rates.
Energy stocks have seen the most selling, with the sector down 3.6%. “They’ll get some relief on costs, and these companies will likely welcome the drop in China’s currency”, he said. With many automakers reporting declines in July sales, such losses could be magnified by further weakening of the yuan.
The currency devaluation would have little impact on Yum!
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“China will continue to calm down”, said Richard Scalone, co-head of foreign exchange at TJM Brokerage in Chicago. The net effect will not only worsen the trade imbalance between the US and China, however, it will also deal a further blow to US exporters more broadly. While one can understand Japan’s need to improve its economy, which has been in the doldrums for decades, Germany has simply misused its position in the euro for national gain among its elite class to the detriment of the import dominated economies within the Eurozone and to the detriment of the non-Eurozone economies such as China.
