Beijing devalue the yuan cascade – Liberation

For the global markets were hoping for a quiet week at the approach of August 15, it is missed. On Thursday, China has further declined for the third consecutive day, the central rate around which the yuan is allowed to fluctuate against the dollar. Beijing has brought the currency to its lowest level in four years: 6.40 yuan to one dollar, against 6.11 yuan Monday

It all started Tuesday, when the Chinese government decided. surprise to devalue the renminbi (RMB), the official name of the yuan, nearly 2%. This sharp depreciation, the most brutal since 2005, caused in turn a shock wave on international stock exchanges and the price of oil.

The measure, expected to be exceptional, however, was repeated Wednesday with a further reduction of 1.6% and 1.1% Thursday with. Some economists now fear a “currency war” that would devalue the nations turn to gain competitiveness against China, where economic difficulties accumulate after the great stock market panic of July. “Other countries could do the same, especially those very economically tied to China” , says Rui Meng, professor of finance at the China Europe International Business School in Shanghai.

Oxygen for exporters

China, meanwhile, just talking about a “correction” need for the market to have a greater role in determining the yuan. So far, its value was set each morning by the Central Bank. A “central parity” was determined arbitrarily, allowing the yuan to fluctuate within a range of – 2 to + 2%. It gave quite a lot of latitude to Beijing to stall the RMB according to political objectives or economic figures of the time. It is this system, criticized for its opacity, which was reformed Tuesday. The Central Bank promised that henceforth she would fix this midpoint every morning by using “full account” the curves of supply and demand observed on the previous day in the markets.

In fact, Beijing mostly reacts to the recent announcement of poor figures on the export front. Victims of the rising cost of labor in China, which increases the “made in China”, and the yuan’s appreciation (+ 1.9% against the euro during the month of July alone), sales China abroad fell 8.3% last month compared to July 2014, according to statistics released on August 8, three days before the first devaluation.

By doing so, the government Chinese first wants to give oxygen to its exporters. But this decision, apparently technical, is also a political message to the International Monetary Fund (IMF). “It is more a reform to include the yuan in the basket of the IMF as to boost growth” , analysis Craig Botham, the asset manager Schroders UK.

” people’s currency ‘

The Institution of Washington must indeed meet in November to decide whether the yuan can join the SDR (special drawing right), an international reserve asset created in 1969 by IMF to supplement the funds of member countries of the organization. Currently four currencies are part of this list, reviewed every five years: the dollar, euro, sterling and the yen. For the Chinese yuan to join the group, which wants Beijing, he must become by the end of the year a currency “freely usable” , determined by the market and not by the authorities. This condition of the IMF, added in 2000, requires that the Chinese currency is “widely used for the settlement of international transactions and widely traded in the principal exchange markets” .

Gold this is precisely the RMB sin, since only is the fifth of the most used currencies in international payments, according to a ranking published in January by the Swift financial company. Reform of the Index System of the yuan – which corresponds to a de facto devaluation – aims mainly to reassure the IMF pointing to the “people’s currency” continues its internationalization process and China’s economy gives more room for “market mechanisms” , as promised in 2013 Prime Minister Li Keqiang during his rise to power.