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The fire may have died down in China, but the burns it left in its wake are still raw, as the Chinese government attempts to bring back some stability by weakening the yuan. Devaluing its currency is proving to be rather injurious for Australian, New Zealand, Singapore, and Taiwanese dollars, as they took a rough tumble earlier this week. Luckily for America though, this drop has proven successful for the USD, as investors are getting bullish on its outcome in coming weeks. But this move on behalf of China’s bank is not to be overlooked or underestimated, since it is being hailed as a one-time fix.
The People’s Bank of China (PBOC) implemented this plan following the IMF’s letdown to endorse the yuan as a reserve currency. When the IMF as good as rejects you, it is generally a harbinger of further struggle as the solution has no choice but to originate internally. So while the devaluation of one of the most prevalent global currencies is being claimed as a single solution fixture, economists are predicting that China’s blind eye toward deeper economic problems call for a more thorough analysis. However, the PBOC’s current goal is to improve the yuan’s midpoint pricing and adjust the real effective exchange rate. Pricing mechanism is key at this stage as China seems to want to assert a more open market policy.
China’s move is a self-named “one-off depreciation”, but international currency analysts are discontent with this designation. “They’re saying it's a one-off, but I don’t think the market’s actually buying that,” said John Gorman, head of dollar interest-rate trading for Asia and the Pacific at Nomura Holdings Inc. in Tokyo. “This might be the start of a broader change. That’s why the market is reacting so strongly.” That may as well be the most accurate hypothesis out there, as China’s central bank sent the yuan down a whopping 1.6% in a very short period, following its big move. Against the dollar, the Yuan dropped 1.9% - just a tenth of a percent away from the 2% above or below the daily reference rate it is allowed to trade at.
China’s real effective rate grew 13% in a year, which painfully overvalued the yuan, setting it up for succinct and epic failure as played out in the stock market crash earlier in the summer. China’s quick fix method is prompting neighboring countries and trade partners to follow suit and weaken currencies as the yuan’s devaluation is making highly volatile waves. China’s plan leaves a lot to hope for, but it is doing the best it can considering it is treading uncharted waters.
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