The move marked a significant shift in how China manages its currency. Earlier, the Yuan’s value was fixed against the dollar by the central authority and allowed to move within a 2% range against that value.
Now, however, the value will be fixed based on the price of the Yuan at the close of the previous trading day.
Official version: The rate fixed had been deviating from the market rate for quite a long time, and it was time to allow market forces a greater say.
Why that could be true:
- The words were logically consistent with the actions, something you can’t always say about official statements.
- China has been lobbying the IMF to accept the into its basket of reserve currency’s, something that will bolster China’s influence at the global level
Why that could be false:
- You can’t usually trust Governments to act on their words, and China doesn’t have a very good track record in this case. The most recent example was when government consistently maintained that it was in favor of market-based approaches before it pledged around $800 Billion in an effort to prop up the falling stock market.
- The timing of the move coincided with a major fall in export levels. China has often been accused of ‘currency wars’ to improve its exports, and not without substance. Might this be another case?
-1x-13) China’s has been forced to sell its reserves in an effort to prop its currency against the dollar. Devaluing its currency will allow it to hold on to its stock.
What we think:
For once, we think that the Chinese are actually walking the talk. Their major motive, that of boosting flagging exports, is not likely to majorly effected by just a 3% devaluation of the currency, especially as the fall is more due to sluggish global demand and a slow-down in key markets. A 3% depreciation is not likely to make a lot of difference.
Our next post will be on how the devaluation affects the world, and the latest stock market collapse. Stay Tuned.
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