Ref : "China Rattles Markets With Yuan Devaluation" , Bloomberg Online

Tuesday 11th August 2015

  

China throws a curve-ball ........

Ref : "China Rattles Markets With Yuan Devaluation" , Bloomberg Online

In a move that few saw coming, China this morning cut its daily reference rate by 1.9% and engineered the yuan's biggest one-day fall since official and unified exchange rates were unified in 1994. The authorities say that this is a one-off measure (mmm, we shall see) amid measures to make the daily fix more market-driven.

There's little doubt that the figures announced over the weekend, showing very poor exports and a rising deflationary risk, will have played a big part in China's decision. July's exports fell 8.3% whilst producer prices slipped 5.4%

Chinese authorities had been propping up the yuan to deter capital outflows and protect those who have foreign currency-denominated debt. Now, it seems, efforts to deal with the economic slowdown have taken precedence, and those who believe that official figures showing 7.0% GDP growth in the last quarter do not reflect the true picture will presumably welcome the move as one that indicates a more realistic, if still private, assessment of the economy.

Also at play here is China's determination to see the yuan accepted as one of the IMF's accepted reserve currencies. Previously, stability in the US$/yuan rate was seen as the best way forward towards that goal, but the IMF has recently been at pains to point out that reserve currencies must be freely usable. The controlling hand of the Chinese authorities in the level of the currency (and of stock-markets, incidentally) does not sit well with that particular requirement.

What might it all mean ?

The move raises the possibility of a "currency war" between China and other nations in the region, who may feel obliged to massage their own currencies lower to keep their exports competitive.

Commodity producers (e.g. Australia) will be worried that any reduction in the purchasing power of the yuan will be another blow to already reeling commodity markets.

There will also be global concerns that a weaker yuan exports deflationary concerns. Combined with a likely stronger US dollar and UK sterling for example, would that play a role in the  rate-setting decisions of those countries ? Probably not for the first one, but may impact on decisions to be made down the line.