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Recap of the Chinese RMB Devaluation

By Antonio Graceffo (安东尼)

Introduction

In August 2015, the Central Bank of China chose to devalue the national currency, the

Yuan, by nearly 4%. The currency of the world’s second largest economy dropping so

abruptly sent reverberation which were felt in China and around the world. This paper,

consisting of information available through early September 2015, will first explain

the RMB devaluation. Second, it will illustrate how the exchange rate for the RMB is

set by the Chinese government. Next, it will analyze the former peg rate used by the

Chinese government in the days before the Chinese economy was liberalized and

more exposed to market forces. Then, the paper will go on to explain the currency

conundrum, China’s competing interests in maintaining both a stronger and a weaker

currency. Next t be addressed will be, how the drop in China’s currency affects the

Yuan becoming an international currency. This is followed by an analysis of the poor

economic indicators leading to the drop in the Yuan. Afterwards, the paper will

discuss both the realized impact and predicted impact the Yuan drop will have on the

Chinese, Hong Kong, and then foreign economies. Finally, the political reaction to the

Yuan devaluation will be discussed.

The Yuan Devaluation

For the last decade, while China grew to become the world’s second largest economy,

China’s national currency, called the Yuan (FX symbol, CNY - Chinese Yuan

Renminbi) has been steadily gaining in value. (Wei) But, in a surprise move, on

Tuesday, August 11, 2015, the Chinese government began devaluating the Yuan,

leading to a 2% drop in by the close of trading. This was the largest devaluation since

the 1994 beginning of China’s modern-exchange rate system. (GOUGH and

BRADSHER) In fact, it was the largest one-day decline in the Yuan ever. (Mullaney)

The devaluation continued for two more days, through Wednesday and Thursday,

resulting in a total devaluation of 4.4%. (GOUGH and BRADSHER)

To prevent the Yuan from sliding further, Chinese state-owned banks sold off dollars,

decreasing their reserve of foreign currency. (SWEENEY and JIANXIN)

“’Apparently, the central bank does not want the Yuan to run out of control," said a

trader at a European bank in Shanghai.’’” (SWEENEY and JIANXIN) The Central

bank used the dual techniques of selling US Dollars and buying Yuan on currency

markets to stem capital outflows from China. (Cendrowski)

Analysts speculated about how to interpret the move. Some believe that the

significance goes far beyond a one-off correction. “In a recent webcast, Tom Orlik,

the Chief Asia Economist at Bloomberg Intelligence, said this shift “wasn’t just about

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devaluation of the currency, this was also about a shift in the way China manages its

exchange rate.” (Bloomberg Professional service)

How the Yuan exchange rate is set

The value of the world's seven most actively traded currencies, called the major

currencies: Euro, British Pound, Australian Dollar, Canadian Dollar, Japanese Yen,

and Swiss Franc are generally expressed in terms of their value against the US Dollar.

The exchange rates for the majors are market-determined, based on the value of daily

trading in the world’s foreign exchange markets. (Evans)

The value of the Yuan, however, is not strictly market determined, but effectively

controlled by the Chinese government. Largely ignoring daily trading activity, a

reference rate is set each morning by the People ’s Bank of China (PBoC), the Central

Bank of the People’s Republic of China. (Fast FT) Using this fixing rate as a mid

point, the central government only allows the Yuan to move plus or minus 2% above

or below. (Wei) The Yuan is closely tied to the Dollar because China manages the

exchange rate against the US dollar. When the US dollar rises against other major

currencies so does the Yuan. (Cendrowski)

In recent years, the PBoC has progressively allowed the Yuan to fluctuate more and

more, over the course of the trading day. (Fast FT) Part of the fallout of the August

devaluations is that the Chinese government stated that they will permit more market

information to influence the value of the Yuan. The fixing point, for example, will be

influenced by how the Yuan closes in the previous day’s trading. (Wei) This should

allow the currency to rise or fall more rapidly. (Inman, Farrer and Ryan)

The recent drop in the Yuan will create more competition for US exporters, as Chinese

export goods will become cheaper. Some experts warn that opening the Yuan to

market forces could weaken the Yuan, putting even more exchange rate pressure on

the US, as Chinese goods would continue to become cheaper. (GOUGH and

BRADSHER)

Currency Peg

Governments can maintain artificial peg rates by closely monitoring international

currency exchange markets. They then use foreign currency reserves to purchase their

own currency when the rate drops below a desired point. Conversely, they can sell off

currency when the rate goes too high. (Ding) Prior to 2005, the Central Bank of China

employed this type of strategy to keep the Yuan tied to a government peg rate. When

the peg was removed in 2005, the RMB was immediately revaluated, going from the

peg rate of 8.27 to 8.11 against the dollar. (Ding)

From 2005 through the August, 2015 devaluation, the RMB was no longer pegged to

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this government peg rate. Instead, the currency has been able to float in a more market

driven scenario, with the value floating within a narrow range of 0.5% around the

central parity published by the People's Bank of China. (Ding) After the devaluation

in August, the Chinese government said that they will liberalize the exchange even

further, allowing market forces greater influence on the value of the Yuan.

Currency conundrum

In the valuation of the Yuan, the Chinese government is confronted with two

conflicting goals. On the one hand, a cheaper Yuan would help Chinese exporters, as

this would make Chinese products cheaper overseas. But on the other hand, opening

the Yuan to market forces could weaken the currency, which could lead to capital

outflows. By artificially buoying the Yuan China can help curtail capital flight which

would weaken the economy as a whole. (Cendrowski) Other concerns for the Chinese

government include avoiding a trade war with the US which could happen if the

Central Bank of China chooses to dramatically weaken the Yuan. This could lead to

other countries devaluating their currencies to keep the price of their exports

competitive with Chinese made products.

Another potential issue for China is that the central government wants to increase the

use of the Yuan as an international exchange currency. In fact, China has been

campaigning to have the IMF recognize the Yuan as a reserve currency. (Cendrowski)

The IMF maintains a basket of reserve currencies, called Special Drawing Rights, the

composition of which it reviews every five years. The most recent review took place

in 2010. (Imf.org) With the next review planned for 2015, the Yuan will have to meet

several requirements if it is to be included. The Yuan must be proven to be "freely

usable," or widely used to make international payments and widely traded in foreign

exchange markets. (Lange) “Freely usable” in IMF terms means that the currency is

widely accepted in international trade. (Imf.org) China must demonstrate that the

Yuan is strong, stabile, convertible, and that the value is market determined. But at the

same time, China wants to maintain a competitive edge on exports. Some of these

goals could best be achieved through a strong Yuan and others through a weak Yuan.

These conflicting benefits of both a stronger and weaker currency present China with

a currency conundrum.

Impact on RMB becoming international currency

For years, voices in the American Congress have accused China of artificially

depressing the Yuan to gain a competitive edge on exports. (GOUGH and

BRADSHER) Consequently, the devaluation was called an unfair tactic by U.S.

lawmakers, who saw it as an attempt to save China’s slowing economy. (SWEENEY

and JIANXIN) The US has typically been one of the biggest critics of The People ’s

Bank of China’s policy of keeping the Yuan pegged to the dollar. This resulted in an

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artificially low Yuan, giving Chinese exports a price advantage. S ince the peg was

removed in 2005, the Yuan has steadily appreciated. (Fast FT)

Ironically, although it was tight government control that allowed the move to happen,

some saw the Yuan devaluation as a sign that China is moving toward a more market

driven economy. (Wildau) And, as China moves to a more market driven exchange

rate, devaluation is an unavoidable consequence. (Wildau) Adjusting the Yuan

exchange rate is not necessarily the first step in causing an exchange rate war. (Wildau)

It may simply be the effect of normal market forces.

The International Monetary Fund (IMF) has commended China’s devaluation of the

Yuan. (Herman) The IMF “told Beijing Friday it wants the yuan to float freely within

three years, applauded the Chinese central bank on this basis.” (Smith) China’s

subsequent decision to allow a wider band of exchange rates for the Yuan will

increase the flexibility of the Yuan, which is a necessary step if China wishes to

integrate its currency into global financial markets. (Herman)

Beijing has been trying to get the Yuan added to the IMF basket of reserve currencies

known as Special Drawing Rights (SDR), which would make the Yuan a more

international currency. (SWEENEY and JIANXIN) “The SDR is a reserve of foreign

currency assets created by the IMF and the basket comprises four key international

currencies—the US Dollar, Euro, British Pound and Japanese Yen.” (Bhattacharya)

China has been pushing for the Yuan to be recognized as the fifth SDR currency.

(Mullaney) Such acceptance would be very prestigious for China. “This is ‘an elite

reserve currency status’” (Spence and Chan) If this happens, China’s global influence

would increase, as the Yuan would sit beside the world’s most important currencies.

(Wei)

Until now, “The IMF has said that "significant work" is needed for the Yuan to be

added to the group.” (Spence and Chan) “To win so-called Special Drawing Rights

status, China has to demonstrate that its currency is ‘freely usable,’ a conclusion the

IMF has refused to draw as recently as 2010.” (Mullaney) If the devaluation reflects a

change in how the Peoples Bank of China will manage the Yuan exchange rate,

namely, making it more market-driven, this may speak in favor of the Yuan being

included in the SDR. (Bhattacharya) Fortunately for Beijing, the IMF saw the

devaluation as positive. In addition to applauding the Yuan devaluation, the IMF has

said that “Beijing should aim for an effectively floating exchange rate within two to

three years.” (SWEENEY and JIANXIN)

Almost in compliance with the wishes of the IMF, the Chinese side has vowed to

allow the Yuan exchange rate to be more market- influenced. “’The PBoC said in its

statement that from today, the reference rate "should refer to the closing rate of the

Inter-bank foreign exchange market on the previous day’". (Fast FT)

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In addition to the prestige factor and increasing China’s influence, being included in

the SDR could have some very real economic benefits for China. For example, it

could make borrowing cheaper for Chinese businesses. It could also mean that raw

materials and commodities could be purchased in Yuan. But to get to that status more

of the world’s central banks will have to hold reserves in Yuan, which would help to

stabilize its value. (Mullaney)

Some saw the devaluation as a hybrid, fulfilling two goals with one move; both a

desperate act to control a falling economy and a move that might help convince the

IMF that the Yuan will now be more closely controlled by market forces. “’The PBOC

has astutely combined a move to weaken the Yuan with a shift to a more

market-determined exchange rate,’” said Eswar Prasad, a Cornell University professor

and former China head of the International Monetary Fund.” (Wei)

Poor economic indicators leading to the devaluation

Theories on why the Central Bank of China decided to devalue the Yuan are as varied

as the speculation about what the long-term impact will be. Some analysts such as

Albert Edwards, from Societe Generale, believe the answer is as simple as the fact

that the Yuan had been overvalued for years and that it needed to be corrected. (Inman,

Farrer and Ryan) The fact that the Yuan dropped after increased exposure to market

factors suggests that it was in fact overvalued, which is not the fault of the Chinese

government. (Smith) While some saw the devaluation of the Yuan as either proof of

the Chinese economy’s lack of stability, or the government’s inability to control it,

others see the move as not only justified, but as a positive indicator of the Chinese

government’s ability to transition to a market driven economy.

Another theory is that the Chinese authorities were concerned about a slowing

Chinese economy, leading to lower demand for commodities. (Mullaney) Over the

last year, consumption in China has slowed, as have China’s exports.

(Euromoney.com) “Exports fell by 8%, followed by a 6.6% drop in car sales and

slower business investment in July. Factory output for the month of July fell short of

the 6.6% projected growth, coming in instead at 6% year-on-year.” (Inman, Farrer and

Ryan) In addition to a downturn in the general economy, Chinese stocks have dropped

significantly over the last several months, with the Shanghai index losing 32% of its

value. (Yan) This forced the government to take steps to stabilize the economy, and a

currency devaluation is one such step. (Hu) Currency devaluation is a sign that the

government is concerned about the economy’s slow growth. (Wei)

Capital outflow is another worrying sign of a softening Chinese economy. China has

seen an outflow of $500 billion in foreign currency reserves. (Sender) These outflows

of foreign capital reserves have resulted in the spot rate for the Yuan trading weaker

than the rate set by the Central Bank of China. (Wildau) One of the factors

contributing to the foreign currency outflows has been the central bank selling dollars

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to artificially prop up the Yuan. (Wildau)

A weak property market, combined with lower domestic demand and exports have

caused the Chinese economy to register growth of only 7%, the lowest in six years. To

counter the economic slowdown the government is planning to offer tax breaks and

interest rate cuts to companies. (Wei) Some foreign analysts do not believe the

government’s reduced growth numbers, believing that the truth is even more grim.

“Some economists believe China's economy is already growing only half as fast as

official data shows, or even less.” (SWEENEY and JIANXIN)

While China closely monitors and controls the Yuan’s exchange rate to the Dollar, it

does not as tightly control the Yuan against other currencies, such as the Euro. A rising

Yuan, against the Dollar, has caused China’s July exports to the European Union to

become more expensive, and consequently fall by 12% compared to a year ago. (Wei)

Since the early economic reforms of Deng Xiaoping many in the West have held some

type of faith in this Communist government’s ability to manage the complexities of a

fast growing, modern economy, in terms of currency, debt, interest, and other aspects

of a market driven economy. (Smith) But what many outsiders forget, and what is

demonstrated by the drop in the Yuan, is that the current government has not even a

fraction of the control over the economy that they did in the days of the Command

Economy.. (Smith)

Those who favor free markets in China have been calling for less government

intervention over the years. But many of those same voices will be calling for more

government control now. The question is, do these reformist voices call for

free-markets in China only when it is good for their own bottom lines, but not for

China’s? (Smith) Rather than seeing the devaluation of the Yuan as grounds to panic

or criticize, one could also see the Yuan devaluation as a perfectly reasonable measure

for a government to take, given the current economic climate. “To encourage

growth—in this case by supporting export industries with a weaker currency—was a

good thing, not an occasion for markets to gyrate and politicians to erupt in protest.”

(Smith)

“William Dudley, head of the New York Federal Reserve, also said an adjustment to

the yuan was probably appropriate if the Chinese economy was weaker than the

authorities had expected.” (SWEENEY and JIANXIN) Economic data would suggest

that the Chinese economy has indeed been weaker than expected, in spite of

government spending on infrastructure projects. (GOUGH and BRADSHER) In fact,

a 24.1% increase in fiscal expenditure was not enough to pull economy out of its

downturn. (SWEENEY and JIANXIN) The state-owned banks are also being

pressured to lend money to companies for investment in factories. (GOUGH and

BRADSHER)

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Impact of the Yuan devaluation in China and Hong Kong

The effects of a currency devaluation in a country the size of China were immediately

felt at home and around the world.

For China, a drop in the Yuan means an increase in the price of servicing foreign debt,

calculated in US dollars. (MAKINEN and MASUNAGA) The manufacturing sector

would also be impacted by the higher cost of raw materials. Commodities, which are

priced in US Dollars immediately became more expensive for Chinese manufacturers,

who are some of the world’s largest importers of oil, copper, and coal. (Mullaney) In

fact, Chinese demand for raw materials is so significant that when the Chinese

economy first began slowing down, in summer 2014, oil prices dropped significantly,

from $110 per barrel to $50. Other commodities, such as nickel, copper and aluminum

dropped to lows not seen since 2009. (Inman, Farrer and Ryan)

Chinese airline stocks immediately dropped as investors estimated the negative effect

the higher fuel prices would have on the airlines’ profit margins. (Mullaney) Chinese

exports suddenly became cheaper for international consumers. However, those

exported products are now being made with more expensive commodities, which is

bad for Chinese manufacturers. (Mullaney) While a drop in the Yuan will make

Chinese products more competitive overseas, Bloomberg professional services

estimates that the higher cost of commodities and raw materials will have a net

negative impact on the Chinese economy. (Bloomberg Professional service)

One industry hit particularly hard by the devaluation would be the automotive

industry which is heavily dependent on importing metals. Less than 5 percent of

Chinese manufactured vehicles are sold overseas. Therefore, the less expensive Yuan

doesn’t help very much in gaining market share abroad. Meanwhile, a slowing

Chinese economy, combined with higher raw material costs are hurting domestic sales.

Auto sales in China experienced the first year-over-year drop in more than six years.

(Bloomberg Professional service) A weaker Yuan should depress auto sales even

further.

Back in 2000, it was predicted that a devaluation of the Yuan could have impact on

the Hong Kong Dollar. (WEI et al.) Now that the Yuan has dropped, it is unclear if

this cut was dramatic enough to impact the Hong Kong Dollar, but, the effects will be

felt in other areas of the Hong Kong economy. The Hong Kong retail sector could be

one of the hardest hit as Chinese tourists may reduce their shopping in the Specially

Administered Region. If retailers begin earning less, retail landlords may even be

forced to reduce rents. (Li) One sector which is benefitting from the Yuan

depreciation, however, is the Hong Kong money changers and banks, as Chinese from

the mainland scramble to move their cash out of the country. Hong Kong has always

been a doorway for cash from China, to the rest of the world. (Steinberg)

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Impact on the US

U.S. stocks fell, as did commodities which China is a significant importer of, such as

copper and oil. There was much speculation that the Yuan devaluation was a sign that

the Chinese economy had slowed and that demand for raw materials would remain

low. (MAKINEN and MASUNAGA) The US Dollar has been strong recently, making

US export products less attractive. A dropping Yuan makes the Dollar-priced products

even more expensive, which could result in decreased demand for US products. At the

same time, Chinese products have become even cheaper in the US which may hurt

domestic sales of US products. “Some analysts worry that China's devaluation may be

exporting deflation around the world.” (MAKINEN and MASUNAGA) Many reports

used the term “currency war” as there were fears that countries would begin

devaluating their currencies to compete with China. At the same time, manufacturers

in other countries may cut prices for goods sold overseas. The reduced income, plus

the cheaper products from China could drive prices down further, causing deflation.

The US dollar has already risen against the currencies of many of its trading partners,

such as Europe and Japan, which has increased the price of US goods overseas. The

drop in the Yuan will further exacerbate this problem. However, many US

manufacturers maintain factories and suppliers across Europe and in emerging

markets as a hedge. (Hu) So, there is both evidence in favor of, and against this Yuan

devaluation having a strong impact on the US economy. Of course, fears still remain

that this cut may be the first of many. A steadily dropping Yuan could make many of

these negative possibilities become realities.

Impact on the UK and Australia

Stock exchanges across both Asia, and Europe suffered losses of about 1%, with the

London FTSE 100 dropping almost 2% at one point, with a net loss of 1.4%. (Inman,

Farrer and Ryan) In addition to a 1.1pc drop in the FTSE, the slowdown in China is

expected to negatively impact mining companies and to put further pressure on British

stock indices. (Spence and Chan) Makers of luxury goods, as well as British retailers

dependent on Chinese consumers, have been hard hit, as a drop in the Yuan made

luxury imports more expensive. Burberry, for example, which has 65 locations in

China experienced a drop in share price of 4.4pc. (Spence and Chan)

China is a large commodity importer and the largest trading partner of Australia. The

drop in the Yuan makes raw materials from Australia more expensive, which may

negatively impact Australia in the form of reduced demand. (Kicklighter)

Immediately after the RMB devaluation The Australian Dollar plunged to a new

six-year low. (Powell) Analysts at Credit Suisse consider the Yuan to be 5 per cent to

10 per cent overvalued, and consequently predicted a continued devaluation, which

will put further pressure on the Australian Dollar, as well as US and Japanese exports.

(Powell) Asian stock exchanges declined, which could affect Australia indirectly, as

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many of the nations hit are Australia’s direct trading partners. (Powell) Analysts in

Australia also believe that a weaker Yuan will result in decreased demand for raw

materials, which will drive commodities prices down. (Powell)

Impact on Asia

While some experts believe that the devaluation of the Yuan will have very little net

impact on the US, they believe that it may have a great impact on other countries who

have China as a significant trading partner. The devaluation may force other countries,

such as Australia, Malaysia and South Korea to devalue their currency as well. While

the drop impacted those currencies immediately, a larger drop in the Yuan and the

consequent impact had already been predicted by some experts, prior to August. “an

analysis by Morgan Stanley in March predicted that a 15 percent drop in the yuan,

much larger than today's move, would cause a 5 percent to 7 percent drop in other

Asian currencies.” (Mullaney) This multiplier effect, if true, could be very worrying,

particularly if the Central Bank allows the Yuan to drop further.

Immediately after the Yuan devaluation, Commodities indexes declined to 2003 levels.

“Broad indexes of Asian stocks, excluding the Japan market, fell 2 percent, plunging

to a two-year low.” (Herman) Asian currencies were also hit. The Vietnamese national

currency, the Dong was hit especially hard. Vietnam, like China, is a country moving

form a centrally planned economy to a more market driven economy. And this

transition is reflected in the handling of exchange rates. The exchange rate for the

Vietnamese Dong is officially considered a managed floating rate, but is also similar

to a crawling peg. (Joiner) Vietnam also widened the exchange band for the Dong.

“Vietnam's move means ‘a currency war started almost immediately,’ said Marshall

Gittler, head of Global FX Strategy at IronFX, based in Cyprus. ” (Herman) Two of

Southeast Asia’s most vulnerable currencies are the Malaysian Ringgit and Indonesian

Rupiah, both of which dropped significantly. (Hu) In fact, the Malaysian Ringgit

dropped by 4.2 percent within days of the Yuan drop, hitting the lowest point since

2009. (Patterson) At the same time, the Rupiah hit a 17-year low. The Australian and

New Zealand Dollars fell to six-year lows. (Herman) Other Southeast Asian

currencies, such as the Thai Baht hit lows not seen in years. (MAKINEN and

MASUNAGA)

Impact on India

Some experts believe that India is largely insulated from downturns in the Asian

markets and that India’s bull market will continue. “’The Rupee is relatively less

impacted in Asia as India is less export dependent,’ said Sue Trinh, head of Asia

foreign exchange strategy at RBC in Hong Kong. “A weaker Yuan is arguably

beneficial for India.’” (Shaaw and Goyal) Contrary to bullish predictions for India’s

stock market, the currency was also hit hard, dropping by one Rupee to the US dollar.

(Bhattacharya) Indian manufacturers, particularly in the textile and chemicals sectors

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will have trouble competing with a cheaper Yuan. (Ashworth) A further drop in the

Yuan would most likely result in a drop in price of Chinese exports to India.

(Bhattacharya) These cheaper exports will mostly be in the sectors of iron and steel,

bulk drugs and chemicals. (Bhattacharya)

India has long run a trade deficit with China. “India’s trade deficit with China has

almost doubled from $25 billion in 2008-09 to $50 billion in 2014-15.” China

accounts for 35% of India’s total trade deficit. (Bhattacharya) A cheaper Yuan will tip

these numbers further in China’s favor. Indian importers of Chinese goods may derive

a slight benefit from a cheaper Yuan. India imports all sorts of cheap products from

China, everything from shoes to components for the electronics sector. Because of the

Yuan, these imports just became a little cheaper. (BBC News) On the other side,

Indian textile manufacturers and chemical producers will now have a harder time

competing with Chinese manufacturers. (BBC News) India’s exports have been

steadily decreasing, if they decrease further, because of the Yuan, it could impact

India’s trade balance. (BBC News)

Impact on Africa

The Yuan drop was particularly felt in Africa. China is not only the largest trading

partner of many African countries, but, some African nations have even added the

Yuan to their foreign exchange system. (BBC News) “In 2011, the Nigerian Central

Bank pledged to store between 5%-10% of its foreign reserves in Yuan, alongside

Dollars and Euros.” (BBC News) Nigeria, and some other African countries,

attempted to use the Yuan to protect local currency from volatility in the petroleum

sector. (BBC News) Africa, like Australia, exports commodities to China, which will

now become more expensive for Chinese manufacturers. This could have a long-term

impact on African currencies. (BBC News)

Impact on Brazil

Moving on to South America, China is Brazil’s main trading partner. Normally, a drop

in the Yuan would be devastating for Brazil, but Brazil’s economy had already fallen

to lows not seen in 20 years. As a result, the impact from the drop in the Yuan is less

significant. (BBC News)

Potential future impact of the Yuan devaluation

There is much speculation about what the long term implications of the Yuan drop

could be. But, given that China is the world’s second largest economy, the effects will

be felt around the globe. (Kicklighter)

The Yuan devaluation is expected to have minimal impact on manufacturing in China.

Much of China’s manufacturing sector is engaged in assembling products for foreign

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companies. (Herman) Companies such as Apple and Nike have their products

assembled in China. (Pierson) The drop in the Yuan has very little effect on the price

that foreign companies pay to have their products assembled in China. (Herman)

Other analysts believe that in spite of the increased cost of raw materials, the

devaluation will have a net positive impact on China ’s economy. “Analyst Gus

Faucher of PNC Bank said the change in currency exchange policy is likely to

‘support growth in China.’” (Herman) While the lower Yuan will make Chinese

products more competitive in foreign markets, it could cause political tensions with

the US. (GOUGH and BRADSHER) China's Ministry of Commerce confirmed the

net gain hypothesis, and that a cheaper Yuan will increase the attractiveness of

Chinese exports. (SWEENEY and JIANXIN) If the Yuan devaluation leads to a

decrease in Chinese demand for raw materials, mining companies across the globe

may see a drop in revenues, particularly in the metals sector. (Bloomberg Professional

service)

If the long term effect of the Yuan devaluation manifests itself in reduced production,

the loss of jobs could be a potential danger for China. Analysts, agree, however, that

this current devaluation shouldn’t have an impact on that scale. (MAKINEN and

MASUNAGA) Any drop in the Yuan reduces the income US companies derive from

sales in China, even if demand remains the same. Lower earnings could result in job

cuts. (USA TODAY) Obviously if there are further devaluations of the Yuan then the

impact on the US would be even greater.

Other experts have an opposite opinion, believing that further drops in the Chinese

economy would have minimal impact on the US economy. “Goldman Sachs analyst

David Kostin says a 1 percentage point drop in China's annual economic growth

would shave 0.06 percent off U.S. gross domestic product.” (Mullaney)

It was expected that the US Federal Reserve was poised to raise interest rates this Fall.

But the drop in the Yuan could potentially delay that increase. “The yield on

benchmark 10-year Treasuries fell more than 5 percent in U.S. trading today, moving

down to 2.12 percent.” This may keep US mortgage rates low. (Mullaney) A strong

U.S. dollar could hurt US exports, having a negative impact on the US economy

which would be worsened by a change in interest rates. (Wei) If the Fed fails to raise

interest rates, it may help certain type of mortgage holders, but not savers. (USA

TODAY)

A drop in the Chinese Yuan, could, cause a currency war in Asia, with other Asian

countries devaluating their currencies, in order to make their exports cheaper. Many

emerging market currencies have already depreciated against the dollar. (Hu) A

full-scale currency war would impact the average consumer in these countries who

would find his buying power reduced when he went to the market. (Herman) A

currency war, with emerging markets devaluating their currencies, could motivate

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investors to pull their money out of emerging markets and back into US Treasuries.

(Hu)

Some financial analysts also believe this could be the beginning of a deluge of cheap

goods from Asia, as other Southeast Asian countries devalue their currencies and

flood foreign markets with cheaper and cheaper products. (Inman, Farrer and Ryan)

A question which remains unanswered is whether this Yuan drop is a one-time fix for

the currency or part of an ongoing strategy of devaluation. Some currency analysts

have already downgraded their year-end forecast for the Yuan. BMI Finance Ltd in

Hong Kong, for example, has predicted a “year end rate of 6.83, down 10 percent

from previous forecasts.” (SWEENEY and JIANXIN) The two questions this leads to

are, will this devaluation really happen? And what will be the net impact on China and

the world?

Brooklyn Monk, Antonio Graceffo is a lecturer at Shanghai University. He is also a

PhD candidate at Shanghai University of sport, writing his dissertation on

comparative forms of Chinese wrestling, in Chinese, with expected graduation in June

of 2016. He is expected to graduate his China MBA, from Shanghai Jiaotong

University, in January, 2016. Antonio is the author of the books, “Warrior Odyssey”,

“The Monk from Brooklyn,” and several others. He has published hundreds of articles

in the fields of linguistics: second language acquisition, as well as martial arts.

Antonio is the host of the web TV show, “Martial Arts Odyssey,” which traces his

ongoing journey through Asia, learning martial arts in various countries.

Bibliography

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