Understanding China’s move to devalue its yuan currency

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Understanding China’s move to devalue its yuan currency

 

China’s central bank has devalued the yuan to its lowest rate against the US dollar in almost three years.
The lender said the move was a “one-off depreciation” of 1.9% in a move to make the exchange rate more market-oriented.

How will china’s yuan devaluation impact the markets?

Simply put, the policy makers are trying their best to save China. The driver behind the sudden policy change is significant weakening of China’s exports in July and rising deflation risk.

As you know, China had artificially managed its currency without letting the market forces determine its currency rate. So now, it looks like this is the end of the fixing as we know it.

Certainly, we are seeing lot of impact on the Asian markets with the currencies of South Korea, Australia and Singapore falling at least 1 percent amid bets other countries will seek weaker exchange rates to keep exports competitive.

While it is too early to judge the full implications of the change… China has indicated that the changes announced are another step in its move to a more market-determined exchange rate.

What will be the immediate impact of this devaluation? It will ofcourse increase the competitiveness of China’s exports at a time when the country’s economy is growing at its slowest rate for six years – and when many economists fear that the slowdown will become much more painful and acute.

But at the same time, this will also reflect that the Chinese economy is not self sufficient (as in the domestic demand is not sufficient) !

 

So, what are your views? Where is China headed?

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