CHINA FIRES THE FIRST SALVO …
The country’s central bank set its official guidance rate for the yuan – its official currency – at 6.2298 per U.S. dollar. That’s the lowest it’s been in three years. The move was also the country’s largest single currency devaluation since 1994, when China ostensibly aligned the yuan with the market.
Chinese officials claim their move was made in order to “improve the yuan’s midpoint pricing to meet the needs of the market,” although the real motivation seems to be far simpler – making its exports cheaper.
Chinese exports are down by 8.3 percent from last year, and devaluing its currency will make its goods cheaper for foreign investors to purchase. Of course unlike America, China has a large trade surplus to support its currency – and its officials signaled as recently as three months ago that a broad-based devaluation was “not necessarily” in the cards.
China referred to its currency move as a “one-off depreciation,” meaning it is ostensibly implementing a new method of managing its exchange rate – something global leaders have repeatedly demanded if the yuan is to be added to the international basket of reserve currencies.
So China is basically killing two birds with one stone.
Oh wait. Somebody already said that …
“(China’s central bank) hit two birds with one stone,” one economist told The Wall Street Journal. “It caused the yuan to weaken, ending support to exports, and it’s making the exchange rate more market-determined, which could help China win the reserve currency status.”
So yeah … what he said.
Of course while the move is good for China’s economy – and the global standing of its currency – it’s already wreaking havoc elsewhere. For example, numerous other countries – India, Russia and Thailand, to name a few – seemed on the verge of devaluing their currencies in an effort not to lose competitive ground to China.
The move also makes it harder for the secretive U.S. central bank – the Federal Reserve – to proceed with a planned interest rate hike in September. How come? Because a rate hike would further raise the value of the dollar – meaning a greater strain on already struggling U.S. exports.
Oh, and the move could impact passage of U.S. president Barack Obama‘s crony capitalist trade deal – which is deeply rooted in the debate over currency manipulation.