Further thoughts on the yuan devaluation

  • David Harris
  • August 13, 2015
  • 0

The potential impact of the devaluation of the yuan against the dollar is occupying headlines around the world. We at Cargo Facts/ACMG are not economists, and when we posted our thoughts earlier this week, we focused on the potential impact on air freight industry.

For those interested in the broader economic impacts, we quote an open letter from Simon Baptist, the Chief Economist of The Economist. (Hard to get more “economic” than that). Here’s what he had to say:

China shocked markets this week by allowing a substantial devaluation of the renminbi’s central parity rate against the US dollar. Following hot on the heels of the stockmarket turmoil that also spurred surprise intervention, it would be reasonable to wonder if China’s government is losing control of the economy. But, as with all headlines that end in a question mark, the answer to mine is “no”. China is undergoing an economic transition on an incredible scale: a continent-sized economy is moving rapidly to higher income status, from investment to consumption, and coming down from 10% levels of growth, while simultaneously opening its financial markets. It’s a tough balancing act, and it won’t all be smooth sailing.

I think there are two key reasons why this week’s action is not a sign of crisis. First, the renminbi has appreciated markedly against almost every currency over the last 18 months: it is still up around 20% against the Euro and Mexican Peso, 15% against the Yen and 10% against the South Korean Won. The story is really one of US dollar strength: the renminbi just could not keep appreciating against most currencies as the economy was weakening. Second, this volatility fits in with the broader trend of liberalisation with some bumps. It is in line with market forces and is something that we should expect to see more of as China liberalises its exchange-rate regime. With the recent interventions in the stock market, I wasn’t expecting now to be the moment to add more “market forces” to the currency, but it is a good reminder that there are a range of voices in Chinese policy circles. There is, of course, a limit to how much volatility the central bank will be willing to accept and so don’t expect to see the renminbi going south of seven per US dollar.

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