Devaluation, note 3. For the third consecutive day, China has lowered by more than 1% this Thursday, August 13 the reference rate of the yuan against the dollar. Tuesday morning, the a Chinese central bank (PBOC), had already lowered this rate of almost 2%, and about 1.6% Wednesday. This is most brutal depreciation recorded by the Chinese currency for more than two decades and implemented by Beijing of the current exchange rate system. Update on the situation in 5 questions.
1. Why does it devalue the yuan China?
The PBOC emphasized its desire to give greater flexibility in China’s currency to its level better reflects market realities. This is for China to make its currency more convertible, prior to its internationalization and its inclusion in the Special Drawing Rights (SDRs), the unit of account of the International Monetary Fund (IMF). The Fund, which is to decide in November, warned that the yuan should be subject to market fluctuations and “freely usable”.
But number observers have mostly seen as a powerful devaluation Beijing effort to revive economic activity in the open slowdown. Chinese exports have in fact dipped 8.3% year on year in July and sales of new cars fell by 7.1%, the worst performance in more than two years. To this must be added the 900 billion yuan spent by Beijing to avoid a stock market crash in July.
And this depreciation of the yuan is a welcome boost to exporters, whose products will be more attractive. The decline of the currency allows them to more easily sell their products and / or increase their margins. Their products are thus cheaper than those denominated in dollars and this promotes “price competitiveness”.
2. How does the Chinese foreign exchange market?
The convertibility of the yuan remains tightly supervised by Beijing, which fears uncontrolled capital flight. The operator of the foreign exchange market local and daily PBOC probe a range of market players, before publishing a daily reference rate of yuan face dollar. The yuan is allowed to fluctuate by 2% either side of the central rate during the exchanges, an enlarged range by the authorities in March 2014.
The PBOC usually took little account of the closing level reached the previous day. In the last four months, the renminbi (another name for the yuan) had fluctuated within a range of only 0.4%, despite downward pressure. Now the central rate will reflect the closing of the previous day, the supply and demand on the market and fluctuations in major foreign currencies, ensures the PBOC.
3. China does raise the currency war?
With this significant devaluation China is the specter of currency war, although she denies it. Ma Jun, head of research of the Chinese central bank, said Tuesday that the depreciation amounted to only an adjustment between administrative parity and the evolution of the yuan on the interbank market. “ Allowing the currency to weaken significantly against the dollar does not mean the beginning of a downward trend” she justified to the official news agency, Xinhua.
The rating agency Standard and Poor’s has also supported this idea. In a memo Wednesday, S & amp; P believes that “China’s surprise decision to allow more flexibility in its exchange rate is quite economically sensible and is not similar to the beginning of a currency war nor an attempt to revive growth. ” Similarly, e Chairman of the Federal Reserve of New York, William Dudley, considered that the devaluation of the Chinese currency seemed “economically justified”.
devaluing its currency, the Chinese central bank also responds to massive redemption policies of assets committed for several years by the Fed and for some months by the European Central Bank. Policies that have allowed the United States and the eurozone strongly depreciate their currencies. Between March 2014 and March 2015, the euro has fallen by for example 23% against the dollar and the yuan. The Bank of Japan, active in the field of money creation, also saw the yen tumbling 35% in three years. It is not illogical that Beijing adjusts its yuan taking into account the monetary policies pursued by its competitors and helped to appreciate its currency.
Who benefits from weaker euro
However, the big losers in this devaluation could be Asian countries. A weaker yuan would weaken the competitiveness of Taiwan products, Singapore, Vietnam and Thailand, facing those of China. Wednesday, the result was in fact no appeal, stock markets Asia the coup accusing Tokyo closed down 1.6 % Hong Kong 2.38% and Shanghai 1.06%.
4. How did the financial markets?
The sudden announcement of the PBOC and the magnitude of the devaluation took the markets by surprise. The major world stock markets stumbled badly Tuesday before diving back Wednesday, like commodity markets – amid fears that Chinese demand -., While the dollar was strengthening
On Wednesday, all European shares ended sharply lower. Companies exposed to China were the most penalized as before. The index ACC 40 of the Paris Stock Exchange ended on a fall of 3, 40 %, the automotive sector undergoing severe pressure, with the image of Renault (-3.87% to 81.56 euros), PSA Peugeot Citroën (-4.94% to 16.83 euros) or Valeo (-4.60% to 115.15 euros). At the Frankfurt Stock Exchange, the Dax index had tumbled 3.27% to it.
However, the situation seemed somewhat calm Thursday morning, l has Paris Bourse in progress, briefly gained 2% and regained some of the ground lost over the past two days.
It should also be noted that the raw materials have particularly suffered from the devaluation of the yuan because they thus become more expensive for China, a major consumer of global resources. Oil prices have fallen by example in New York Tuesday to their lowest level in more than six years.
5. What will be the effects of the devaluation?
The main positive effect as it is recalled to promote exports should benefit from this devaluation. But it will also lead to swelling debt in dollars of Chinese enterprises.
Inflation in the country may also climb, with the rising cost of imports denominated in foreign currencies. Capital flows out of the country, from investors worried that melted the value of their assets, could also accelerate. According to Tom Orlik, Bloomberg Intelligence office, a 1% depreciation of the real exchange rate of the renminbi could boost 1 percentage point growth of Chinese exports, but to blow away the equivalent of $ 40 billion of capital.
In the United States, whose exports are likely to be penalized, the Federal Reserve (Fed) could further delay the rise in interest rates.
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