[Editorial] Devaluation of yuan

What does it mean for those companies dependent on China?

Global news media promptly labeled this a “devaluation”, and the usual set of pundits and politicians denounced the move as “currency manipulation”. Further, industries such as the Chinese iron and steel industries, which have been suffering from overcapacity, will be able to use this window of opportunity to boost their exports. The figures show that, of the survey respondents, 127 central banks own dollars, 109 hold sterling, 108 have euros and 88 have yen.

Proper devaluation of the renminbi will alleviate the pressure on monetary policy.

The move by China overshadowed positive developments in Greece, where a new bailout plan was agreed on and approved by the Greek parliament on Friday. So what China really is saying is that its currency is market based when the value is declining but not when it rises.

Regarding the US, although the impact of a Chinese economic slowdown on the U.S.is likely to be muted, Goldman Sachs is still urging investors to stay away from stocks with significant exposure to China given the country’s laggard performance so far this year.

Some foreign politicians have accused Beijing of meddling with the exchange rate.

The currency is still only allowed to fluctuate up or down two percent on either side of the reference rate. China’s devaluation of its yuan last week helped gold recover some lost ground, pulling it up from a 5-1/2-year low of $1,077 reached during a late-July rout. The central bank said it will step in when the market sees excessive volatility or becomes swayed by herd behavior. “China’s bumpy downshift in growth is likely to extend, making for greater macro and market volatility along the way”.

A man walks past yuan signs at a currency exchange in Hong Kong. Actually, the Chinese government doesn’t want to see the RMB devaluing greatly because the instability will hurt its chance of joining the SDR.

If this move threw the US Federal Reserve off the path of raising the funds rate in September, it is a bonus for China.

“In important gold consuming nations, such as China, India, Indonesia, and Vietnam, as well as other EMs, consumers may have fewer tools at their disposal with which to protect savings and household wealth against rising prices or low or negative real interest rates“.

Foreign exchange traders will digest the RBA’s board meeting minutes on Tuesday for clues as to its interest rate strategy.

“In the future, even if the central bank needed to intervene in the market, it may be in either direction”, he added.

The author Mike Bastin is a visiting professor at the University of global Business and Economics in Beijing and a senior lecturer on marketing at Southampton Solent University’s School of Business.

For importers from China like Target (TGT.N), Walmart (WMT.N) and Home Depot (HD.N), both reporting next week, the tailwind is expected to be offset by the expectation of a slower global economic growth, according to Michael Yoshikami, CEO of Destination Wealth Management in Walnut Creek, California.

The sharp changes in the money supply and bank loans for July are temporary and manageable. Therefore, its exchange rate move last week was in the nature of testing the waters.

The Chinese Renminbi, or the yuan, should remain strong in the long run, a central bank official said Thursday, after worries that the bank’s adjustment of the exchange rate mechanism earlier this week would lead to a slump in the currency. That has injected a fresh momentum for a steady renminbi.

Immediately after the tariffs ended, Chinese companies flooded the U.S. market with improperly subsidized tires again, threatening U.S. tire plants and jobs.