In recent trade, the People’s Bank of China (PBOC) set the yuan at 6.9255 vs. the last close of 6.9155. The Chinese government maintains strict control of the yuan’s rate on the mainland. The onshore yuan (CNY) differs from the offshore one (CNH) in trading restrictions. The CNH is not as tightly controlled as its onshore counterpart. Each morning, the PBOC sets a so-called daily midpoint fix for the exchange rate, based on the yuan’s previous day’s closing level and quotations taken from the inter-bank dealer.
China’s persistent economic troubles have led to the devaluation of its currency. The aggravated depreciation of the yuan during January 2016 stirred concerns among investors and commentators that the move was not only the beginning of a renewed wave of capital outflows but a sign that Beijing had doubts about the future growth of its economy. Though the move ignited fears of a global recession, the yuan’s devaluation was not entirely unanticipated, and likely won’t have devastating knock-on effects.
Despite political pressure from the US, China has spent over a trillion dollars retaining an artificially valued renminbi. This made Chinese exports cheaper than they would have been otherwise, giving a competitive edge and a source of growth. The effect of ensuring an undervalued renminbi would have eventually led to excessive inflation, capital flight and significant imbalances in the economy. China, instead opted to revalue its currency, an action in line with Beijing’s goal of bringing the country away from its model of low-value, export-dependent production towards increased consumption and investment dependence.
When dealing with an economic superpower like China, the effects of currency devaluation are influenced by political forces. For years, a more laissez-faire Washington (with an unofficial policy of benign neglect rather than explicit policy action) ignored the artificially low renminbi value. The Trump administration is not expected to be as patient with China.
Since the US exports fewer goods into China than it imports, Beijing is more reliant on the US than the other way around. Yvonne Mhango, an economist at Renaissance Capital, says the net of imports between the two countries highlights a subtle aspect. She points out that as the US has approached full employment in recent months, the Federal Reserve’s fear that the trade imbalance would impinge on US jobs has declined. Nevertheless, while the US has had a long-standing trade deficit with China, there may be elements of reciprocity that Washington can leverage to cool China’s depreciation plans.
So, what are the implications of a devalued yuan for financial markets?
Essentially, since China is the largest global importer of everything from oil to iPhones, a devaluation in its currency could result in a decline in global trade, as it makes imports more expensive. However, given that the overall effective devaluation is still modest, the concern about any lasting contraction of global trade may well be overstated.
Sim Tshabalala, Standard Bank Group’s joint-CEO, goes so far as to assert that China’s currency has taken its rightful place amongst the world’s currencies. The fact that a drop in the Chinese currency now causes global panic reveals that the yuan has, in fact, become even more significant in the world market. It indicates that the global economy and its financial flows have become more reliant on the currency, which in turn has bigger implications for global growth.
Global fears arise, however, from the potential of the devaluation affecting China’s economy, global capital flows and, indeed, access to cheap products, and thus, negatively impacting the growth and welfare of countries as far afield as Australia and Zambia. This concern is heightened by the economic disparities of a maturing Chinese economy seeking escape from excessive debts, constraints on GDP growth and the realities of an aging society.
Gary Kleinman, an economist who has previously written on this, however, offers some reassurance. “Initially, Chinese economic figures and a weaker currency are causing short-term market jitters. But, realistically, we need to first understand just how massively indebted the government of China is” before panicking about the outcome, he said.
All eyes are on the Trump administration and how it will unfold its commitments to work on overseas trade policies, particularly in terms of China. Trump has claimed that the yuan is undervalued and that the PBOC should face consequences. While many experts continue to argue that the yuan is extraordinarily undervalued, it is, in fact, significantly overvalued owing to China’s high inflation, and the PBOC continues to intervene to deflate it further. Trump has accused China of “raping” the US, convinced that it is deliberately manipulating its currency downwards to diminish US jobs.