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2015-08-12 14:17:18
Aug 11th 2015, 9:00 by Buttonwood
THERE have been some dramatic devaluations in history think of sterling in 1967 and 1992, or Argentina in 2001/2. When currencies decline, they do so in a big way. China's devaluation of the yuan today is less than 2%, but it is also being treated as a major story. Robert Peston of the BBC says it is more significant than either the Greek crisis or if the Federal Reserve raised interest rates. The combination of falling commodity prices and weaker emerging markets is certainly a worry.
Bears have predicted that a Chinese devaluation would send a new wave of deflation* round the globe. It would force Asian competitors to respond with their own devaluations, reducing import prices in the developed world. This might lead to job losses in the west or reduced profit margins. Charles Dumas of Lombard Street Research, a consultancy, recently wrote that it:
would export the deflationary impact to its trade competitors in the rest of the world. In addition, countries that became notably overvalued, such as the US and UK, could be weakened as cheap imports cut into margins. This is how the current bullish cycle in stock markets could end.
But a 2% devaluation is neither here nor there. It will hardly be a massive boost to Chinese exports, which fell 8.3% in July. The Bank for International Settlements calculates real trade-weighted indices for different currencies; as of June, China's index was 126, up from 111 a year earlier and 105 in September 2012. This shift is just a marginal retracement of that gain.
So this move looks more like a signal than anything else. In particular, it may be a response to IMF concerns about whether to grant the yuan reserve currency status and inclusion in the special drawing right (SDR) basket. China would very much like to get that status, partly for prestige reasons and partly to help its financial sector. So a little bit of currency flexibility might help, yet the move is not big enough to really annoy the country's Asian neighbours or the Americans.
But can China manage the process effectively? A limited devaluation may encourage traders to expect more, whether the People's Bank of China (PBoC) says so or not. And that will require the PBoC to use reserves to defend the new rate. It has lots of reserves, of course, but still the recent $300 billion reduction might give the authorities pause.
China is trying to juggle several balls at once; to move from an investment-led economy to a consumption-led model without letting growth slip too far, to rein in speculation in property and equities without damaging industry, to engage with markets without being hit by volatility, and to expand its financial sector without suffering the hot money flows that destabilised Asia in the late 1990s. It would be surprising if it didn't drop at least one ball. And its task is so complicated that it is bound to send out confusing signals every now and then.
China's yuan currency falls for a second day
China's Central Bank has again cut the guiding rate for the national currency, the yuan, a day after Tuesday's record 1.9% devaluation.
The move sent fresh shockwaves through Asian markets, but the bank has sought to calm fears, saying it was not the start of a sustained depreciation.
This is now the biggest two-day lowering of the yuan's rate against the dollar in more than two decades.
The commerce ministry said the lower rate would boost struggling exports.
Figures released at the weekend showed Chinese exports fell more than 8% in July, adding to concerns the world's second largest economy is heading for a slowdown.
There were further signs of weakness on Wednesday, when figures showed industrial production in July rose 6% from the previous year. The rise was smaller than expected and was also below the 6.8% increase seen in June.
Fixed asset investment, a measure of state spending on infrastructure, expanded 11.2% for the first half of the year, also below estimates and at its lowest since December 2000.
However, the action on the yuan has sparked fears of a global and destabilising "currency war". There has been criticism from the US, where markets fell sharply overnight.
Read more: Asian stocks down on lower yuan
Karishma Vaswani: Not why, but why now?
One-off?
On Wednesday, China's central bank fixed the "official midpoint" for the yuan down 1.6% to 6.3306 against the dollar.
The midpoint is a guiding rate, from which trade can rise or fall 2% during the day.
China has long kept tight control of their currency's value
Until Tuesday, that rate had been determined solely by the People's Bank of China (PBOC) itself. But the rate will now be based on overnight global market developments and how the currency finished the previous trading day.
The bank, which had called Tuesday's 1.9% cut a "one-off" adjustment, sought to reassure financial markets on Wednesday.
"Looking at the international and domestic economic situation, currently there is no basis for a sustained depreciation trend for the yuan," it said in a statement.
Analysis: Karishma Vaswani, Asia Business Correspondent
But the question we should be asking isn't how much did China's devalue its currency by - but why now?
China's been under international pressure to allow its currency to be driven by market forces as opposed to by the government for years. The US has been its biggest critic - saying that Beijing keeps the currency artificially low to help boost exports.
So in theory, China says it is doing what the US and the international community wants. According to the language of the Chinese central bank - China will now allow the yuan's value to be more flexible.
Backing from IMF
The International Monetary Fund said the move to make the rate more market-based "appears a welcome step".
"Greater exchange rate flexibility is important for China as it strives to give market-forces a decisive role in the economy and is rapidly integrating into global financial markets," the international lender said in a statement.
"We believe that China can, and should, aim to achieve an effectively floating exchange rate system within two to three years."
The IMF added, though, that the decision would not affects its considerations of Beijing's hopes for the yuan to be added to the "special drawing rights" (SDR) reserve currencies.
These are currencies which IMF members can use to make payments between themselves or to the Fund.
China has long been lobbying to have the yuan included alongside the dollar, euro, yen and the British pound.