International News (Issue 364) – 14 August 2015

As most of you will have seen from the mainstream press, the big news this week was the surprise move by the Chinese central bank to devalue the Chinese Yuan (CNY).

The significant weakening in the Chinese economy this past 2 years has ultimately forced China to take progressive steps toward devaluing its ‘overvalued’ exchange link to the US-dollar, and ultimately improving its export competitiveness.

The move is significant in both its timing (the US Federal Reserve will likely raise interest rates next month) and its scale (the People’s Bank of China effectively widened the permissible daily currency move from 0.5% to 2%).

The move can be seen as a constructive one by the PBOC, and an additional and pragmatic step in its ongoing financial reform.

What the ex-China investment community took fright from however, was the surprise nature of the move and its size. There is suggestion that in spite of the pragmatism it is an indication of how bad the economic outlook in China must have gotten for the PBOC to devalue the currency, since the signal this implicitly sends to the population is one of economic weakness and more importantly, an admission of such by the government.

Further concerning to global policy-makers is the idea that with Chinese currency devaluation, it will ‘export deflation’ to the world economy. As the engine of global growth, even in weaker form, if the Chinese currency is worth less it certainly improves their export competitiveness relative to the rest of the world (and particularly its Asian neighbours), and it also exports ‘profit margin pressure’ to western companies selling goods in China.

We will watch this situation closely since it clearly has ramifications for Australian corporate profitability (miners again) and for global growth.

The broad suggestion is that the CNY could devalue up to 10% in the coming 6 months, having devalued 3% already this week.

Disclaimer:
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