Here's why China devalued its currency

[TaiShang]

China devalues yuan ahead of major financial change
11.08.2015

AP photo

The People's Bank of China (PBC) conducted the most ambitious devaluation of the yuan in two decades. The Central Bank reference rate was reduced by 1.9%. Pravda.Ru asked an expert opinion from the head of the sector for economics and politics of China at the Institute of World Economy and International Relations, Sergei Lukonin.

"One of the main reasons behind the devaluation of the yuan is an attempt to raise the competitiveness of Chinese products in international markets. Production costs are rising, the cost of labor is increasing, total exports are slowing down, but domestic consumption does not compensate for the losses in the slowdown of exports," said Sergey Lukonin.

Unlike Russia, China does not fear the devaluation of its national currency. Why is it so?

"China's financial system is under control, they have no free-floating exchange rate for the yuan. They are still considering this opportunity as a way to regulate the national economy," said the expert.

Pravda.Ru also asked the expert about the dollar peg of the Chinese yuan. Is the financial system of China independent?

"Under the conditions of global economy, it is no longer possible to say who depends on whom. Everything has been so deeply integrated. China is a full-fledged player of the global economy. Let's not forget that the Board of Directors of the International Monetary Fund is gathering for a meeting this autumn to discuss, among other things, the possibility to include the yuan on the list of international reserve currencies. Technically, the yuan is becoming one of the world's reserve currencies. The yuan will have to become a freely convertible currency for this. To achieve this, restrictions for capital accounts operations will have to be lifted," Sergei Lukonin said.

The analyst suggested that market fluctuations may start as soon as the yuan becomes a freely convertible currency.

"Now it is believed that the yuan is undervalued. I think that the Chinese authorities deliberately understate the value of the yuan, to subsequently reach a more or less acceptable level. They have done it before joining the WTO. They increased tariffs before they started negotiating with the WTO administration to finally lower the tariffs to the desired level. Maybe now they are trying to use this method again."

The decision of the People's Bank of China may start another stage of "currency wars" and competitive weakening of national currencies, the WSJ wrote.

"I do not understand what it a currency war means. There are all these formulas that take into account the balance of payments, exports and so on. But no one can say how much any currency should cost, as the value of any currency is defined by speculative factors. Of course, there will be people who will make a lot on a difference in exchange rates, but I do not think that this can be referred to as a currency war," the expert told Pravda.Ru

- See more at: China devalues yuan ahead of major financial change - English pravda.ru

 

[TaiShang]

Here's why China devalued its currency
AUGUST 11, 2015, 8:02 AM
Forbes

China’s currency cuts aren’t always an attempt to bail out exporters. The most recent move has bigger policy implications.

Donald Trump may very well have a field day with today’s currency news, as analysts predict. But he shouldn’t.

Today China’s central bank devalued the country’s currency, the renminbi, by about 2% against the U.S. dollar. It was the biggest one-day move since the renminbi, or yuan, officially de-pegged from the U.S. dollar in 2005. The yuan maintains a close relationship with the dollar and trades 2% in each direction from a midpoint selected by China. Today, that midpoint went from 6.11 yuan per U.S. dollar to 6.22.

Trump and others may say China is purposely devaluing its currency to help exports. After all, its economy is struggling to hit the government 7% growth target.

But is that what’s really going on?

For the most part, China has recently actually wanted its currency to steadily rise, for political reasons and to keep capital from flowing out of China. China’s domestic and international goals align with a stronger yuan. That helps explain why presidential candidates like Trump haven’t been spouting off about China’s currency management as much of late.

The answer to why China’s government devalued its currency Tuesday probably has more to do with the dynamics of global currency markets than a sudden urge to help Chinese exporters make their goods cheaper on the world market.

First, the yuan is strongly related to the dollar because China still manages the exchange rate within a range against the dollar. When the U.S. dollar rises rapidly against world currencies, like it has in the past year to pull almost even with the euro, the yuan also rises against China’s trading partners’ currencies.

China has wanted the yuan to steadily rise against trade-weighted partners for a while. To keep that appreciation gradual, as the dollar rockets upwards, it may have to devalue a little, says Jonathan Anderson, at Emerging Advisors Group, one of the clearest observers of China’s markets. “But this is not the same as a “competitive devaluation” of the renminbi —and there’s nothing like that on the cards,” he wrote today.

“All China is doing today is managing the pace of trade-weighted renminbi appreciation,” Anderson continued. “Any attempt to gain truly meaningful competitiveness vis-à-vis trading partners would require, say, a 20% to 40% devaluation against the dollar.”

If China had devalued the yuan by, say, 20%, it would clearly be an effort to boost exports for its advantage. A 2% devaluation is different: it simply keeps the yuan a little more in line with trading partners’ currencies, which have lost value relative to the U.S. dollar. (For more on the U.S. dollar’s rise, read this recent Fortune piece.)

As mentioned, China actually wants a stronger currency. As recently as April, it was actively trying to strengthen the yuan, the Wall Street Journal reported. The country’s central bank purchased the yuan in the currency markets and sold U.S. dollar holdings, a move aimed at stemming capital outflows from China as the yuan was falling.

As Chen Long of Gavekal Dragonomics in Hong Kong recently explained, China has twin (and sometimes competing) goals for exchange rates. On the domestic front, it wants to help exporters with a cheaper currency, but it also wants to maintain a strong currency to prevent capital outflows that may weaken the country’s economy further. On the international side, China wants to avoid a trade war with the U.S., which it would have if it severely weakened the currency. It also wants to boost international use of the yuan for political purposes, as China asserts itself more strongly around the world. The country’s recent campaign to have the yuan join the mostly meaningless IMF reserve currency is one example of China desiring a strong currency. In the end, these multiple goals again promote a slightly stronger currency.

China’s central bank said Tuesday’s yuan depreciation was a way to make the country’s financial system more market-oriented. The bank said market spot prices would now determine the daily position, implying that the central bank would step in less to influence it. Over the past few months the yuan-dollar spot price had been lower than the exchange rate, and it became clear the central bank was supporting a stronger yuan.

There are reasons the government doesn’t deserve the benefit of the doubt when it says it’s in the business of market-based approaches. President Xi Jinping’s administration said the same thing before pledging around$800 billion in government money last month to prop up the falling stock market. China’s words and actions don’t always match.

But there are also reasons that today’s devaluation shouldn’t only be viewed through the prism of trade. First, other exporters in Asia, including South Korea and Taiwan, are hurting because of weak demand abroad. Sluggish economies in Europe and the U.S. influence China’s exports. That’s is not all solved by currency devaluations. Second, China can use other mechanisms to boost its economy. Internet rates and bank reserve requirements can still be cut considerably, and analysts expect that to happen. More government spending is already in the works: China’s banks will issue 1 trillion yuan worth of bonds for infrastructure spending, according to recentreports.

For now, it’s too early to say China is starting a currency war, even if that may be the West’s first inclination.

***

WSJ reports:

"A weaker yuan could hurt the competitiveness of firms outside China by making their goods and services relatively more expensive, while companies that generate sales in China could find revenue and profit generated in yuan are worth less in their home currency.

“Worries about what this might mean for the competitiveness of the West versus the East” are driving the stock market selloff, said Chris Jeffery, an asset-allocation strategist at Legal & General Investment Management.

Shockwaves from China’s yuan devaluation will be felt by all kinds of investors, and will likely prompt questions from U.S. politicians. Heard on the Street’s Aaron Back and Abheek Bhattacharya discuss.

In Europe, shares in LVMH Moët Hennessy Louis Vuitton SE fell 5.4% and Gucci owner Kering SA was 3.9% lower. Car maker BMW AG lost 4.3% and Daimler AG fell 5.2%, dragging Germany’s export-heavy DAX index to a 2.7% decline.

Shares in BHP Billiton PLC were down 5.0% and Rio Tinto PLC lost 3.1%.

Yields on 10-year U.S. Treasury bonds fell to 2.139%, the lowest closing level since May 29. The equivalent German yield fell to 0.59%. Yields fall as prices rise."

Global Stocks Fall After Yuan Move

Global stocks fell Tuesday after China’s central bank devalued its currency and a Greek official said Greece and its international creditors agreed on terms for a third bailout.

WSJ.COM|BY CHRISTOPHER WHITTALL

 

[xunzi]

A big poop poop of nothing basically.

 

[Providence]

I like how desperately the op tried to paint this as the next best thing to happen to humankind after Industrial revolution

 

[opruh]

Good, as long as it hurts the US economy according to Trump then I'm happy.

 

[rcrmj]

I like how desperately the op tried to paint this as the next best thing to happen to humankind after Industrial revolution

and it is, ending Dollar world dominance is good for the world

 

[NiceGuy]

“All China is doing today is managing the pace of trade-weighted renminbi appreciation,” Anderson continued. “Any attempt to gain truly meaningful competitiveness vis-à-vis trading partners would require, say, a 20% to 40% devaluation against the dollar.”

If China had devalued the yuan by, say, 20%, it would clearly be an effort to boost exports for its advantage. A 2% devaluation is different: it simply keeps the yuan a little more in line with trading partners’ currencies, which have lost value relative to the U.S. dollar. (For more on the U.S. dollar’s rise, read this recent Fortune piece.)

Yeah,CNY will devalue 20-40 % soon, time to say bye bye to currency swap wt CN now

btw: 40% is so close wt my prediction

 

[Providence]

Yeah,CNY will devalue 20-40 % soon, time to say bye bye to currency swap wt CN now

btw: 40% is so close wt my prediction

THeir currency have been devalued to a 4 year low indicating the how sharp this devaluation has been.

China's economy will go down in a flash.

China's slowing down is different from other similar slowdowns actually. China is investing trillions of dollars and on top of that we are seeing a crashing of it's growth rate. I am curious how the economy would have behaved if there would have been no govt push.

and it is, ending Dollar world dominance is good for the world

Hmm, so it is your currency crashing against the dollar to a 4 year low and you are dreaming of ending dollar dominance ?

Einstein was right afterall ...

 

[Fenrir]

THeir currency have been devalued to a 4 year low indicating the how sharp this devaluation has been.

China's economy will go down in a flash.

China's slowing down is different from other similar slowdowns actually. China is investing trillions of dollars and on top of that we are seeing a crashing of it's growth rate. I am curious how the economy would have behaved if there would have been no govt push.



Hmm, so it is your currency crashing against the dollar to a 4 year low and you are dreaming of ending dollar dominance ?

Einstein was right afterall ...

A drop in the Yuan is helping, not hindering the dollar by causing more investors to seek safety in its embrace, so if, as the Chinese members suggest, the dollar is being killed by the Yuan, they're having the opposite effect:

China’s Yuan Shock Boosts Dollar, Euro Amid Flight to Safety

China Shock Boosts Dollar in Safety Bid; Aussie at Six-Year Low

China's Yuan Devaluation Is Great News for U.S. Dollar

And persistent weakness in China helps the US too:

Treasuries Are a Winner as China Exports Deflation Says Bill Gross

The Yuan fell again today:

China tries to calm currency war fears as yuan slips further

 

[Providence]

A drop in the Yuan is helping, not hindering the dollar by causing more investors to seek safety in its embrace, so if, as the Chinese members suggest, the dollar is being killed by the Yuan, they're having the opposite effect:

China’s Yuan Shock Boosts Dollar, Euro Amid Flight to Safety

China Shock Boosts Dollar in Safety Bid; Aussie at Six-Year Low

China's Yuan Devaluation Is Great News for U.S. Dollar

The Yuan fell again today:

China tries to calm currency war fears as yuan slips further | Top News | Reuters.com

China can talk big but ultimately it has to take shelter in Dollar when it's pants get pulled down by lowering growth rates


The move puts pressure on other central banks around the world to push down their own currencies to help their own exporters and to prevent destabilizing capital flows. The move could hurt commodities markets because it signals potential weak demand from China. It could also accelerate capital outflows out of China, especially if investors expect further devaluations.

 

[jhungary]

lol.most people don't know what and why China lower the currency. Like any of us, your guess is as good as mine.

2% Devaluation is not much, however, the importance of this devaluation is not about actual number (ie the devalue %) but rather the message it sent to trader and investor.

Basically, it mean that Chinese Currency lost it appeal to the market, that's the only strong reason why one devaluate their own currency. When the interest on using Yuan lower, the only way to attract investment is to deflate your own currency but the question is, why would China need to do that if they have an absolutely healthy economic forecast like they want to say or they want to portrait. The only answer is that the glooming forecast is actually fake...

That did lead to an ultimate question, how low can Yuan go? There is a point it will actually hurt local business and local economy if the yuan deflate, however, on the other hand, the overestimation of Chinese market and over stretched export driven economy have to rely on a deflation to readjust back down to normal level. And that is the million dollar question itself.

 

[cnleio]

That did lead to an ultimate question, how low can Yuan go? There is a point it will actually hurt local business and local economy if the yuan deflate, however, on the other hand, the overestimation of Chinese market and over stretched export driven economy have to rely on a deflation to readjust back down to normal level. And that is the million dollar question itself.

The lower Yuan can help to expand overseas export ... the cheaper 'Made in China' will hit TPP nation export, especially those developing nations. 2015 is not a good year for world export trade, following Japan Yen devalued ... China also do the same thing. The American families still willing to purchase 'Made in China' goods with new cheaper price.

In a worse time of world economy, '薄利多销' means this.

 

[EAsian]

I think this action hold more meaning than the depreciation of yuan.It may means China finally allowed market play a bigger role in deciding the value of yuan.It will cause the appreciation of yuan in long term because it will attract more investment in Chinese yuan in long term.The market just haven't got it.

 

[jhungary]

The lower Yuan can help to expand overseas export ... the cheaper 'Made in China' goods will hit TPP nation export, especially those developing nations. 2015 is not a good year for world export trade, following Japan Yen devalued ... China also do the same thing.


The lower Yuan can help to expand overseas export ... the cheaper 'Made in China' goods will hit TPP nation export, especially those developing nations. 2015 is not a good year for world export trade, following Japan Yen devalued ... China also do the same thing.

The problem is, JPY is at the bottom, it already sent the message a long time ago (about 20 years ago) that their economic model is none other than healthy.

There is a point of no-return for devalue its own currency, I am not saying this is necessarily a bad thing, but it could be a piece of alarming news. Again, not all the company can take the devaluation, some company will definitely gone bust after this in order to weed out the unhealthy enterprises, again, the question is, how many Chinese Company can take this devaluation and how low can Yuan go? Obviously the value now is still too high. as 2% actually did not make any different.

 

[大汉奸柳传志]

We bought enough oil for the strategic reserve and now we want to sell stuff that‘s why