Weaker Yuan Is China’s Latest Measure to Spur Economic Growth



Weaker yuan

China has allowed its currency to fall over the last week. This is the latest weapon China (FXI) has pulled out of its arsenal to put its ailing economy back on track. Prior to this, China had reduced its benchmark one-year lending rates four times since November 2014.

The benchmark one-year lending rate in China stands at 4.85%. This is a historically low interest rate in the Chinese economy. Apparently, even during the 2008 financial crisis, China didn’t cut the one-year lending rate below 5%. This can be seen in the previous chart.

However, this is 2015. It’s a new era for the Chinese economy. The Chinese economy grew at 7.4% in 2014—the slowest growth rate in 24 years. This year, growth is expected to fall to 7%. As China’s growth sputters, it has resorted to aggressive rate cuts to boost its ailing economy.

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What prompted China to let the yuan depreciate?

China’s dismal trade data, which were released on August 8, likely prompted the currency devaluation move. A weaker currency makes China’s exports more competitive in the global markets.

From the perspective of aluminum companies including Alcoa (AA) and Rio Tinto (RIO), China’s aluminum exports could increase further in the coming months on the back of a favorable currency.

Together, Alcoa and Allegheny Technology (ATI) form ~8% of the SPDR S&P Metals and Mining ETF (XME).

Series overview

In this series, we’ll look at the recent aluminum industry indicators and explore recent trends in aluminum prices and inventories. This should help you understand the aluminum industry’s underlying fundamentals.

We’ll begin by analyzing the implications of the recent fall in the yuan for aluminum producers.


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