The yuan’s drop has caused volatility in currency markets over the past few days.
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Asian stocks were little changed on Monday as investors” nerves continued to settle after “s surprise yuan devaluation last week, while the dollar held modest gains against the euro after upbeat U.S. economic data. Currency, commodity and sharemarkets all dropped. It’s argued for years for greater reliance on “the market” – as opposed to government officials – to determine the exchange rate. But to give too much credence to the “currency war” or “mercantilism” narrative misses the big picture.
As markets gyrated, commentators hyperventilated and expert economists debated whether it was a devaluation or a depreciation.
On Tuesday, the People’s Bank of China (PBoC), China’s central bank, devalued the renminbi by lowering its reference rate by 1.9%, triggering the currency’s largest decline since China moved to a managed floating exchange rate system in January 1994.
Moving away from a decade-long yuan appreciation may also leave the markets mired in uncertainty that can be easily translated into volatility, according to Credit Suisse analysis. The People’s Bank of China may welcome the benefits of a slightly weaker yuan, but it also appears to see the dangers of an all-out currency war. It’s a risky move, but worth taking if it stabilizes the world’s second-biggest economy and nudges it toward a market-determined financial system -assuming Xi’s team truly knows what it’s doing. “Even if the central bank needs to intervene in the market in the future, it could be either way”. At the same time, PBOC has been setting out to reassure markets that the RMB is now “stable”. On August 11, the central bank announced that the fixing, going forward, would be based on the close on the prior day.
Eager to redress the imbalances in the global economy, the US, the UK as well as Japan, among other countries, engaged in a sustained campaign to make their currencies more competitive, implementing expansionary monetary policies – quantitative easing – which, by extension, also made their exports more affordable. This is consistent with industrials PMI (purchasing managers’ index leading indicator), which shows further slowing.
The nearly exponential rise in the internationalization of the yuan can be appreciated by the whopping 321 percent leap in the value of yuan-denominated payments since December 2012. The downward pressure in recent months must therefore be from the capital account. The U.S. Energy Information Administration estimates that Iran’s storage volumes alone could immediately increase global supply by 100,000 barrels a day as soon as a treaty is ratified.
China has been trying for years to secure qualification and acceptability of the yuan as one of the basket of currencies used by the International Monetary Fund as its reserve assets that are known as special drawing rights (SDRs).
That has put the market focus back on a looming U.S. rates increase.
China’s apparent efforts to have a more open regime for its currency is seen having limited impact on the Gulf Co-operation Council region, at least in the short-to-medium term. This was sustainable while the country was able to maintain extremely rapid growth; but growth is, inevitably, slowing as China runs out of surplus labor.
Together with the heavy-handed response to June’s sharemarket correction, triple dipping on the adjustment again suggests, at best, a lack of policy finesse.
The move came less than two weeks after First Minister Nicola Sturgeon’s triumphant return from a trade mission spanning Beijing, Shanghai and Hong Kong, where she claimed “huge success” in bolstering the prospects of more than 50 Scottish companies. Assurances that it is over will lack credibility in the markets.
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The US Federal Reserve will have to reconsider any interest rate hike, which will only worsen the country’s balance of payments.
