Yuan move may head off more adjustments

So the notion that China is evolving into a more market-oriented country is to impose a particularly American perspective on Chinese actions. Impose trade barriers if Beijing will not comply. By 1994 it was 8.62 RMB to the dollar (the lowest ever on the record).

Contrary to received wisdom, China has not pursued so-called “export-led growth” for the past decade. “Its creating shockwaves as China being the second largest economy in the world has broken that stability”, Biswas said.

China is the primary importer for raw materials such as iron ore, copper, and crude oil. To cool the overheating and tame inflation, the Chinese central bank has been raising the yuan until it reached a record high of 6.0395 to the dollar in January 2014.

Starting last Tuesday, China’s central bank devalued its yuan more than 4 percent for three days in a row, setting the daily reference rate at around 6.4 yuan to the U.S. dollar.

Conveniently, the move also provides relief to Chinese exporters.

The recent devaluation dragged down nearly every currency in Asia in panic sell-offs.

James Withers, chief executive of industry body Scotland Food & Drink (SF&D), said China is a “hugely important market” and has been designated one of the group’s top seven areas for development world-wide. PBOC has explained that it has done this to widen the bands within which the RMB can trade in response to market forces, without the need for frequent direct interventions. Regulators relaxed requirements for loans and equity investments.

In addition, exports to Singapore – whisky’s third-biggest market by value – fell by 39 per cent to £200m. US lawmakers might have railed against China’s move, but they were hardly heard complaining when the US dollar sank more than 40 per cent between 2002 and 2011.

While speculators were primarily focusing on gold and silver, platinum was being supported by budding optimism that this year’s price slide will encourage more demand from carmakers and jewelers.

China is vulnerable, after all.

The yuan was effectively devalued 10% earlier this week, so the talk from PBOC seems frivolous at best.

In the 1990s, currency crises were confined to emerging markets, most notably in the round of currency devaluation across Asia in 1997.

For Japanese manufacturers and automakers, China’s general economic slowdown hurts them more than a few percentages of currency devaluation.

“The last review was in 2010, when the IMF rejected China’s request to have its currency included in the SDR basket on the basis that the RMB was not “freely usable”, according to the following indicators: the currency composition of official foreign exchange reserves, worldwide banking liabilities, worldwide debt securities and global forex markets turnovers”. There goes the US’s chance at reforming itself and stopping to use monetary stimulus to fudge real economic deficiencies. The Korean won has lost 7.9 percent while the Singapore dollar has declined by six percent year-to-date.

If the Chinese government simply stood back and let its currency float, its value would fall much faster and farther and the effects on U.S.-China trade balances would be far greater than what has happened.

Interestingly, the post-recession period actually saw a steady appreciation in Chinese currency (renminbi), as Western countries and worldwide financial institutions called on China to revalue its currency, liberalise its capital markets, and shift into a more consumption-driven economy. “China’s currency adjustment is relatively minor compared to those very big moves by the euro and the yen“, the expert added. The G7 and the International Monetary Fund have praised the evolution of the RMB, but hinted that China is not there yet. It put to an end to years of speculation and rumours of Beijing quietly buying massive amounts of bullion.

The yuan devaluation has caused the most volatility in ASEAN as their stock markets also dropped together with their currencies.

The point is that China is in no way moving to free markets that any common sense American would understand.