China's economy is slowing. Its stock market began to crash back in July. And the volatility rocking financial markets has been widely linked to the recent yuan devaluations by China's central bank.
"Surprise" has been a common word used by investors and financial pundits to describe the devaluation -- as in, "China's central bank surprise devaluation of yuan."
But what if we told you it wasn't a surprise -- it was in fact an expected event?
Below are three excerpts from analysis that EWI's own Chris Carolan published in his Sun-Tue-Thu Asian-Pacific Short Term Update on July 30 (several days before China's central bank first move to devalue the yuan against the U.S. dollar), then on Aug. 9 and Aug.11 (bold added).
This morning's newswires are filled with stories of yet another dramatic intervention by China in the Yuan exchange rate. This time, though, it's in favor of the Yuan. That news, more than any, has investors alarmed as it seems to suggest that China has lost control. To that, I say how can you lose something you never had?
China Never Had Full Control
China and its financial authorities, namely the Peoples Bank of China, are viewed as the effective forces controlling the Chinese money market. That means not just the currency but also the financial markets and inflation. Hence, the state of alarm currently dominating markets makes sense. But the fact is that China never really had the control that investors believed it had. Because simultaneously controlling monetary policy and the currency is like "trying to hold the stick at both ends;" it's just not possible. Continue reading "Has China Lost Control?"→
It was less than a week ago that we pinned down the growing possibility that China would move to devalue the Yuan. Then – Bang! Since this morning, it's a done deal. Or is it? While China's move to devalue the Yuan (by roughly 1.9%) in a single day is the most aggressive Yuan devaluation since the "roaring" nineties, chances are this is only the beginning.
China Must Regain its Competitiveness
The core of the matter here is that China is trying to maintain the facade that this was a one-shot deal. However, it really has more to do with the government's attempt to free the Yuan rate. Beijing, it seems, may have finally bowed to the realities of market economics. Even as it enacts reforms to liberalize its financial markets and change its economic model, China must regain its competitiveness when it comes to exports. Continue reading "China Devalues The Yuan: Now What?"→