[ECOCN]The curious case of China's currency
China's devaluation of the yuan is less than 2%
but it is also being treated as a major story
it is more significant than either the Greek crisis
or if the Federal Reserve raised interest rates
The combination of falling commodity prices
and weaker emerging markets is certainly a worry
Chinese devaluation
would send a new wave of deflation round the globe
It would force Asian competitors to respond with their own devaluations
reducing import prices in the developed world
This might lead to job losses in the west
Reduced profit margins would export the deflationary impact to its trade competitors
countries that became notably overvalued
such as the US and UK
could be weakened as cheap imports cut into margins
This is how the current bullish cycle in stock markets could end
But a 2% devaluation
will hardly be a massive boost to Chinese exports
which fell 8.3% in July
So this move may be a response to IMF concerns
about whether to grant the yuan reserve currency status
and inclusion in the special drawing right basket
a little bit of currency flexibility might help
yet the move is not big enough to really annoy the country's Asian neighbours or the Americans.
A limited devaluation may encourage traders to expect more
And that will require the PBoC to use reserves to defend the new rate
China is trying to juggle several balls at once
to move from an investment-led economy
to a consumption-led model
without letting growth slip too far
to rein in speculation in property and equities
without damaging industry
to engage with markets
without being hit by volatility
to expand its financial sector
without suffering the hot money flows
The counter-argument is that
currency wars are good news
as they are usually accompanied by monetary easing.
Even if all currencies end up where they started
the world will have easier monetary policy
The big question here is
If monetary policy has lost its effectiveness
and the only positive result from QE is the currency impact.
it is a zero-sum game.