# Why Did China Devalue Its Currency? Two Big Reasons



## LastOutlaw (Jun 1, 2013)

http://www.nytimes.com/2015/08/12/u...-currency-two-big-reasons.html?abt=0002&abg=0

Why Did China Devalue Its Currency? Two Big Reasons

Here are two things that China's government wants very badly: first, for its economy to remain on an even keel, keeping growth and employment high. Second, for its currency, the renminbi, to become a pre-eminent global currency that helps promote the country's diplomatic goals and solidify the country's centrality to the global economy.

Frequently those goals are in conflict. But Tuesday, it found a way to advance both at once.

That's how to make sense of some blockbuster news out of Beijing that the country will adjust how it manages the renminbi to make the currency's value respond more closely to market forces.
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The immediate result was a de facto devaluation, with the Chinese currency falling 1.8 percent versus the dollar and 2.2 percent versus the euro Tuesday. Those are big moves for the renminbi, considering that the government had a policy of maintaining a strict trading band - enforced with both legal restrictions on the transfer of capital and the government's trillions in reserves. Usually, the renminbi will move only a few hundredths of a percent against the dollar in a given day; the largest move this year was 0.16 percent.
Photo
A fruit vendor in Beijing on Tuesday. China's central bank devalued the nation's currency. Credit Rolex Dela Pena/European Pressphoto Agency

But a roughly 2 percent shift in the value of a currency, even a major one, is not that big a deal, and certainly not the kind of thing that would earn blaring headlines about a devaluation. The dollar has risen 22 percent against the euro in the last year; the Japanese yen plummeted 24 percent against the dollar in late 2012 and early 2013. What makes the Chinese move fascinating is what it says about China's approach to its currency and economy, and about the country's role in the global financial system in the future.

The Chinese economy is unquestionably in a rough patch, and maybe something worse. Growth is downshifting from the double-digit rate of a few years ago, and the country's investment-and-exports-driven growth model is looking exhausted after driving a generation of prosperity. A stock market crash in the last few months hasn't helped.

But a hidden cost of the Chinese government's strategy of keeping the renminbi within a narrow trading band versus the dollar has been that China has been unable to use one of the crucial tools most countries use when they're in an economic slowdown.

The renminbi on Monday was at about the same exchange rate versus the dollar that it was in mid-December. But in that span, the dollar index was up 8.7 percent, meaning the dollar - and by extension the renminbi - were up that much against the currencies of other advanced nations like the euro, the Japanese yen and the British pound.

Linking the value of its currency to the dollar has had benefits, but in the last year has come at a big cost: It has resulted in the renminbi's rise against competitors and trading partners at a time the economic fundamentals of China would argue for it to fall.

Meanwhile, China is looking to assert more of a leadership role in the global economy, and an important piece of that is establishing the renminbi as a reserve currency. The dollar and the euro have a reach and usefulness far beyond the borders of the countries that issue them, and China would like the yuan to have a similar sway in global trade and finance, especially within Asia.

But you can't really be a global reserve currency when you maintain all the restrictions that China insists upon in the interest of keeping control of its domestic economy. The dollar wouldn't play its central role in global finance if the American government made it illegal to exchange it for other currencies in many circumstances or used legal prohibitions and aggressive interventions to keep its value from fluctuating in response to market forces.

In other words, China has wanted some of the diplomatic benefits of the renminbi's becoming a more important currency abroad, without paying the price at home.

Just last week, the International Monetary Fund said that the renminbi was not quite ready for prime time for inclusion in the basket of currencies it uses for "special drawing rights," a reserve asset that currently is a mix of dollars, euros, yen and pounds. Christine Lagarde, the I.M.F.'s managing director, said China needed to make its currency more "freely usable." And the policy change on Tuesday, by moving closer to a world in which markets determine its price, is a step in that direction.

That doesn't mean it was without cost. The cheaper renminbi will mean higher inflation and will create an even greater burden for Chinese companies that owe money in dollars, potentially setting off a new round of failures. Perhaps more important in the long run, as China liberalizes its currency, it gives up a crucial tool that the government has used to manage the economy for years and protect itself from being buffeted by global economic forces. China's leadership has been reluctant to give up that power, and that's why Tuesday's announcement came as such a shock across global markets.

But it isn't often that a policy choice helps achieve two big national goals at once. And when faced with one, it appears China's leaders were willing to give up a little bit of power for, they hope, better economic results at home and a bigger role in the global financial system abroad.


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## Marcus (May 13, 2012)

I don't disagree with anything in the article, but it failed to mention a couple of points.

As exports have faltered and even shrunk to major export partners (-1% to the US and -12% to the EU y/y), China needs to buy some time for their stock markets to settle and allow their businesses time to adjust to lowered demand for their products. Artificially lowering the price of their exports helps to do that by undercutting their competitors. Much like the Japanese, the Chinese view business as war by a different means. It's one of the reasons they're dumping steel like they have dumped solar panels in the past.

The other big issue is the cost of manufacturing and shipping products over there has risen to the point where it's only about 8% cheaper to manufacture in China versus the US. For many companies, such a small cost difference makes it attractive to re-start manufacturing here since many consumers will pay a small premium for US manufactured goods.

The big thing to always remember with China is full employment and a rising living standard. If either falters for more than short periods of time, we're liable to see some significant political turmoil.


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## LastOutlaw (Jun 1, 2013)

I'm stunned that they even mentioned China's wish to be added to the basket when the next SDR occurs. MSM usually doesn't mention these types of issues. Word is China was told maybe next year and they are pissed and trying to bring down our market as well as try to stabilize theirs.

Silver and gold are up today


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## Marcus (May 13, 2012)

LastOutlaw said:


> Word is China was told maybe next year and they are pissed and trying to bring down our market as well as try to stabilize theirs.
> 
> Silver and gold are up today


Silver is down nearly 1% while gold is marginally up overnight.
http://www.cnbc.com/pre-markets/

China has to solve their own issues with their markets before they can do anything else. They're still not allowing short selling or large stockholders to sell. The last time I looked (and it's been several weeks), there were a large percentage of stocks (~30-40%) that had voluntarily chosen to have trading suspended.

What we're seeing over here may be a small bit of the effect on the Chinese markets. Most of the cause for the choppy markets here is due to earnings misses, lower growth and earnings forecasts, and oil going down. Volatility is still low though companies are being heavily punished for missing on earnings.

One stock I own lost *40%* on Friday ($8 to $5) for missing earnings by 3 cents. Me being me, I bought call options once the elevator down reached the basement. It's up about $1 since Friday's close, and I stand to do pretty well on my options purchases. I already pulled out half the money in one options tranche out by agreeing to sell for a 450% profit on or before options expiration in January 2017. Even at the close today, a person could still do what I did and risk $550 ($100 more than I risked) to make $2500.


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## hiwall (Jun 15, 2012)

China is also getting rid of US treasuries. So far a few hundred billion. 
I think quite possibly the bogus world financial situation is starting to unravel. Time will tell.


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## LastOutlaw (Jun 1, 2013)

*China stuns financial markets by devaluing yuan for second day running*

*China stuns financial markets by devaluing yuan for second day running *

http://www.theguardian.com/business/2015/aug/12/china-yuan-slips-again-after-devaluation

Stocks, currencies and commodities fall sharply across region as investors fear a stalling China economy and possible currency war despite Beijing's assurances

China stunned the world's financial markets on Wednesday by devaluing the yuan for the second consecutive day, triggering fears the world's second largest economy is in worse shape than investors believed.

The move sent fresh shockwaves through global markets, pushing shares sharply lower and sending commodity prices further into reverse as traders feared the move could ignite a currency war that would destabilise the world economy.

There were widespread losses in Asia, and in Europe stock markets suffered falls of about 1%, with the FTSE 100 tumbling almost 2% at one stage.

The Chinese currency hit a four-year low on Wednesday after the People's Bank of China set the yuan's daily midpoint even weaker than in Tuesday's devaluation.
Live Markets slide as China moves to weaken yuan again - live
Central bank lowers guidance rate as new economic data disappoints
Read more

With the bank having said that Tuesday's move was a "one-off depreciation", the rapid drop in the value of China's currency - about 4% in the past two days - dealt a blow to appetite for risky assets, and markets across the region plunged amid concerns that Beijing has embarked on a damaging currency war.

The unexpected yuan devaluation saw Chinese stocks slump in Hong Kong, with the Hang Seng China Enterprises Index sliding 2.6%, extending its loss this quarter to 15%. The Shanghai Composite Index lost 1% to 3,886.32 and the CSI300 index of the largest listed companies in Shanghai and Shenzhen fell 1.2% to 4,016.13 points.

Shares in airlines were hit particularly hard as investors feared a weaker yuan would contribute to higher fuel bills. Air China lost 4.4% while rivals China Eastern and China Southern dropped close to 6%.

Contributing to the slump were worse than expected economic figures with fixed-asset investment falling short of expectations. The crucial gauge on the country's growth came in at 11.2% for the first seven months from the same period last year, acording to official data. Economists had forecast a rise of 11.5%.

China's factory output for July also missed expectations, coming in at 6% year-on-year growth instead of the 6.6% expected. Adding to the slew of bad data was retail sales for July, which amounted to approximately 2.43tn yuan, up 10.5% from June, but also short of market expectations of a 10.6% rise.

The Nikkei stock market index in Japan fell 1.6%; South Korea's Kospi was down 0.56%.

The Australian dollar, often seen as a proxy for the Chinese economy, fell again to a fresh six-year low of US$72.25c, having been sold off heavily on Tuesday. The US dollar, on the other hand, rose strongly again against all Asian currencies. Key industrial and construction materials nickel, copper and aluminium hit six-year lows.

"China's currency moves will hurt appetite for risky assets such as equities and commodities," Rajeev De Mello, head of Asian fixed income at Schroders in Singapore, said.
Analysis Chinese yuan: everything depends on what happens next

"While it is too early to say whether this is the beginning of a sustained devaluation of the yuan, other central banks may be forced to follow suit and that may trigger a fresh round of currency weakening around the emerging world."

Spot yuan fell to 6.43 per dollar, its weakest point since August 2011, after the central bank set its daily midpoint reference even weaker than Tuesday's devaluation. The currency fared worse in offshore trade, touching 6.57.

The central bank, which had described the devaluation as a one-off step to make the yuan more responsive to market forces, sought to reassure financial markets on Wednesday that it was not embarking on a steady depreciation.

"Looking at the international and domestic economic situation, currently there is no basis for a sustained depreciation trend for the yuan," the PBoC said on Wednesday.

Tuesday's devaluation followed a run of poor economic data and raised market suspicions that China was embarking on a longer-term slide in the exchange rate. It was the biggest one-day fall in the yuan since a massive devaluation in 1994.

A cheaper yuan will help Chinese exports by making them less expensive on overseas markets. Last weekend, data showed an 8.3% drop in exports in July and that producer prices were well into their fourth year of deflation.
Analysis Why has China devalued its currency now and what impact will it have?
Beijing devalues yuan by nearly 2% against dollar, which will make Chinese goods cheaper after figures showed 8.3% fall in exports in July
Read more

The International Monetary Fund said China's move to make the yuan more responsive to market forces appeared to be a welcome step and that Beijing should aim to achieve an effectively floating exchange rate within two to three years.

Beijing has been lobbying the IMF to include the yuan in its basket of reserve currencies, known as Special Drawing Rights, which it uses to lend to sovereign borrowers. This would mark a major step in terms of international use of the yuan.

"Greater exchange rate flexibility is important for China as it strives to give market forces a decisive role in the economy and is rapidly integrating into global financial markets," an IMF spokesperson said.


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## LastOutlaw (Jun 1, 2013)

stock market down again. silver and gold go up again.


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## hiwall (Jun 15, 2012)

LastOutlaw said:


> stock market down again. silver and gold go up again.


But I need silver to go back down again because I want to buy some more!!!!
Silver is up over a dollar an ounce in a week!


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## Marcus (May 13, 2012)

http://www.cnbc.com/2015/08/12/china-gets-cold-feet-about-floating-yuan.html

The People's Bank of China (PBoC) weakened the yuan against the dollar for a third consecutive day on Thursday, following reports the central bank intervened to stem the currency's sharp slide late on Wednesday.

The PBoC set the yuan fixing at 6.4010, compared to the previous day's close of 6.3870, sending the currency 0.7 percent lower to 6.43 per dollar in early trade.

Thursday's fix was 1.1 percent below Wednesday's fix of 6.3306, a pause from the aggressive weaker fixings in recent days: On Tuesday the fix weakened 1.9 percent and then 1.6 percent on Wednesday.

Traders said Thursday's slower pace of devaluation made sense following reports by the Wall Street Journal that the central bank asked state-owned lenders to sell dollars on its behalf in the last 15 minutes of U.S trading on Wednesday, which caused the yuan to rally 1 percent against the greenback after falling to fresh four-year lows in intraday trade.

Earlier on Wednesday, the PBoC warned it was not pursuing steady depreciation in response to allegations that Beijing was manipulating the currency to boost exports.

The central bank has yet to confirm the supportive action, but it is broadly being treated as fact by market insiders.

Cold feet

Wednesday's intervention signaled the central bank may have gotten cold feet about its commitment to loosen the reins on the exchange rate. Experts say the PBoC acted to prevent the renminbi from falling too rapidly, a consequence that was widely flagged when the PBoC first announced a more market-oriented yuan just 24 hours earlier.

It looked as if the rules of the game were clear, that the PBoC will take the market's view before setting the daily fixing. As we could realize by the PBoC's massive intervention to keep the exchange at a depreciated but manageable level, this will not be as simple as that," Natixis said in a report.

The PBoC devalued the currency by about 2 percent on Tuesday and said it would set the spot rate according to the previous day's closing central parity rate, effectively allowing the currency to trade freely and inviting near-term currency weakness. Wednesday's poor July industrial production data also increased pressure for even more depreciation, National Australia Bank economists warned in a report.

*The Poor July Data mentioned in the article:*

China released a raft of disappointing economic data for July on Wednesday, adding to concerns about the world's second largest economy and raising expectations of further stimulus from the government.

Retail sales rose 10.5 percent in July from the year earlier, according to the National Bureau of Statistics, below the 10.6 percent rise forecast in a Reuters poll and following June's 10.6 percent rise. 
Industrial output, meanwhile, grew an annualized 6.0 percent in the month, lower than expectations for a 6.6 percent gain and after a 6.8 percent uptick in the previous month. 
In addition, fixed-asset investment, a key economic driver, expanded 11.2 percent in the first seven months of the year from the year-earlier period, missing estimates for a 11.5 percent gain and compared with a 11.4 percent gain seen between January and June.

"The data misses reflect the impact of the recent equity market crash, which reduced consumer spending power and diverted bank lending away from the real economy and into the government-orchestrated equity buying," said Dariusz Kowalczyk, senior economist and strategist at Credit Agricole.

"With less lending to the real economy, investment slowed," he added.

Chinese equities suffered their worst month in almost six years in July, prompting the government to roll out a host of measures to bolster investor confidence, including establishing a market stabilization fund to put a floor under share prices.

July economic indicators are closely watched as they provide an insight into how growth momentum is faring into the second half of the year.

The Chinese economy grew 7.0 percent on-year in the second quarter, in line with the previous three months and a touch better than analyst forecasts. 
Wednesday's data follows weaker-than-expected trade data published over the weekend, which showed exports sliding 8.3 percent on-year in July and imports slumping 8.1 percent.

"The government will need to do more to revive growth," said Kowalczyk.

"It seems like currency depreciation is one of the tools authorities are employing, but they will likely boost infrastructure spending and ease monetary policy further," he said.

The People's Bank of China surprised markets on Tuesday by devaluing the yuan by almost 2 percent and vowing to refer to more market-based valuations in setting the daily trading band for the closely-managed currency.
Li-Gang Lui, chief China economist at ANZ, shared a similar view to Kowalczyk. He warned that if conditions did not improve in the coming months, growth could fall below 6.5 percent in the July-September quarter.

"Fiscal policy will have to take a bigger role in H2. In fact, the State Council has recently reiterated to pursue proactive fiscal policy in its meeting at the end of July," Liu said.

"If government is still serious in reaching 15 percent fixed asset investment target, FAI investment growth should reach 18.6 percent in H2, led by infrastructure investment in the coming months."


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## Marcus (May 13, 2012)

This makes me think things are a lot worse over there than we've been led to believe. The 12% drop in exports to the EU represents a 2% drop in total exports.

I had an idea that part of the reason we're seeing such fast devaluations is because their exporters were encouraged by their government to use leverage as much as possible. Sure enough, that's right. In 2008, total Chinese debt was 100% of GDP. in 2014, it was 250% of a GDP that had doubled since 2008. In USD, their debt was about 4.5 Trillion in 2008 and about 26 Trillion in 2014. While most people think China has large foreign reserves, and they do, but it's only about 3.65 Trillion USD.

Here is an article from last year that seems prescient: http://www.economist.com/news/leade...conomy-it-risks-zombifying-countrys-financial

"Since most financial crashes are preceded by a frantic rise in borrowing-think of Japan in the early 1990s, South Korea and other emerging economies in the late 1990s, and America and Britain in 2008-it seems reasonable to worry that China could be heading for a crash. All the more so because the nominal growth rate, the sum of real output and inflation, has tumbled, from an average of 15% a year in the 2000s to 8.5% now, and looks likely to fall further as inflation hit a five-year low of 1.6% in September. Slower nominal growth constrains the ability of debtors to pay their bills, making a debt crisis more likely."
"Reasonable, but wrong. China has a big debt problem. But it is unlikely to cause a sudden crisis or blow up the world economy. That is because China, unlike most other countries, controls its banks and has the means to bail them out. Instead, the biggest risk is complacency: that China's officials do too little to clean up the financial system, weighing down its economy for years with zombie firms and unpayable loans."

I can see the Chinese Central Bank continuing to devalue their currency since it does several favorable things for them.
It devalues the debt held in yuan which makes it easier to pay back (cheaper dollars or yuan in this case.) If all of their debt is held in yuan, they have devalued their total debt by the equivalent of over 1 Trillion USD this week.
By devaluing the yuan, they are making their exports cheaper relative to the USD and the Euro. That should increase exports.
Since commodities have already tanked this year, their raw material costs have already dropped. Those costs will go up due to the devaluation but will likely still be below forecast costs.
Since imports to China will now cost 5% more, expect imports to drop on everything but raw materials.

What they're doing is a slick way to use synergies to get a 2-fer or 3-fer one on their devaluations. Expect other countries with debt issues to pay attention.


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## BillS (May 30, 2011)

I don't think much of the New York Times article. China is looking to stimulate exports by devaluing their currency. Other countries will follow. Eventually it will become a race to the bottom. 

It doesn't make sense to devalue your currency when you have to import raw materials. It just makes your citizens poorer.


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## Marcus (May 13, 2012)

BillS said:


> It doesn't make sense to devalue your currency when you have to import raw materials. It just makes your citizens poorer.


Since copper is down 25% over the last year, there's a lot of extra wiggle room. It does make imported goods (and raw materials) more expensive, but it also makes your exported goods cheaper.

China has been on a run to monopolize certain industries like steel, aluminum, rare earth mining, and solar cells. This is a strategic plan to dominate future heavy industry manufacturing for geopolitical purposes.


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## readytogo (Apr 6, 2013)

*The World`s factory....*

China's economic woes extend far beyond its stock market ,first this a totalitarian government ,you have no control of nothing so for the last 30 years they have been on a roller coaster of free credit and spending well just like our Great Depression, now China's government believed it could engineer a soft landing in the transition from torrid double-digit economic growth, fuelled by exports and investments, to steady and balanced growth underpinned by domestic consumption, especially of services. And, in fact, it enacted some sensible policies and reforms. 
But rapid growth obscured many problems. For example, officials, seeking to secure promotions by achieving short-term economic targets, misallocated resources; basic industries such as steel and cement built up vast excess capacity; and bad loans accumulated on the balance sheets of banks and local governments.Nowhere are the problems with this approach more apparent than in the attempt to plan urbanization, which entailed the construction of large new cities - complete with modern infrastructure and plentiful housing - that have yet to be occupied. More to come ............


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