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Measure content performance. Develop and improve products. List of Partners vendors. The first devaluation marked the most significant single drop in 20 years. The move was unexpected, and many believed it was a desperate attempt by China to boost exports in support of an economy that was growing at its slowest rate in decades. However, the PBOC claimed that the devaluation was part of its reforms to move toward a more market-oriented economy.
The move had substantial repercussions worldwide. After a decade of steady appreciation against the U. However, many speculators in foreign exchange forex markets use a high amount of leverage.
Automatic stop-loss orders are one of the best ways for leveraged forex traders to protect themselves from sudden policy changes. Stock markets in the U. Most currencies also reeled. Some argued that the move signaled an attempt to make exports look more attractive, even as the Chinese economy's expansion slowed. However, the PBOC indicated that other factors motivated the devaluation. That made the POBC's claim that the devaluation's purpose was to allow the market to be more instrumental in determining the yuan's value more believable.
The devaluation announcement came with official statements from the PBOC that as a result of this "one-off depreciation," the "yuan's central parity rate will align more closely with the previous day's closing spot rates. There was also another motive for China's decision to devalue the yuan—China's determination to be included in the International Monetary Fund 's IMF special drawing rights SDR basket of reserve currencies.
The SDR is an international reserve asset that IMF members can use to purchase domestic currency in foreign exchange markets to maintain exchange rates. In , the yuan was rejected on the basis that it was not freely usable. The IMF welcomed the devaluation, encouraged by the claim that it was done in the name of market-oriented reforms. Consequently, the yuan became part of the SDR in Within the basket, the Chinese renminbi had a weight of As currency rates and interest rates are interlinked, the cost of borrowing from the IMF for its member nations would now hinge in part on China's interest and currency rates.
That provided evidence that the government's slashing of interest rates and fiscal stimulus had not been as effective as hoped. Thus, skeptics rejected the market-oriented-reform rationale. Unlike other central banks, the PBOC is not independent and faces claims of interference when big moves occur in its value. Capital Economics Senior China Economist Julian Evans-Pritchard said by linking the yuan's devaluation to the latest tariff threats, the PBOC has "effectively weaponised the exchange rate, even if it is not proactively weakening the currency with direct intervention".
A weaker yuan makes Chinese exports more competitive, or cheaper to buy with foreign currencies. From the US perspective, it is seen as an attempt to offset the impact of higher tariffs on Chinese imports coming into America.
While it appears a win for consumers around the world - who can now buy Chinese products more cheaply - it carries other risks. A weaker yuan will also make imports into China more expensive, potentially driving up inflation and creating strains in its already slowing economy , as well as pushing currency holders to invest in other assets. Back in , China's central bank pushed its currency to its lowest rate against the US dollar in three years, in part to deal with easing growth.
The central bank said the move was designed to support market-reforms. The last time the yuan traded at the 7-level against the dollar was during the global financial crisis. Capital Economics Mr Evans-Pritchard said China has long argued the 7-per-dollar level is an arbitrary threshold, "but had previously intervened to prevent the currency from breaching this threshold". As noted earlier, the undervalued yuan has also led to the permanent transfer of hundreds of thousands of manufacturing jobs out of the U.
A substantial and abrupt revaluation in the yuan, while unlikely, would render Chinese exports uncompetitive. Although the flood of cheap imports into the U. Yuan revaluation may do little to stem the exodus of U. Mitigating Factors and Glimmers of Hope.
There are some mitigating factors and glimmers of hope on the issue of yuan revaluation. A number of analysts maintain that one reason for the huge increase in U. Specifically, a significant proportion of these imports are from multinational companies based in China that use facilities located in the nation as the final assembly point for their products.
Many of these companies have moved their production facilities from higher-cost nations such as Japan and Taiwan to China. Finally, concerns that China may dump its holdings of U. Treasuries in the event of yuan revaluation seem largely overblown. The Bottom Line. Little is to be gained by U. A trade war would create global financial turmoil and wreak havoc on investment portfolios, apart from reining in global economic growth and perhaps even triggering a recession.
But that scary scenario is quite unlikely, even if the rhetoric is ratcheted up by both sides. The most likely outcome going forward is one of gradual appreciation of the yuan, accompanied by measured dismantling of currency controls as China moves toward a freely convertible currency. So it may be a few years before the yuan terminates its tango with the greenback and heads out on its own. Monetary Policy. Your Privacy Rights. To change or withdraw your consent choices for Investopedia.
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