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Why Yuan Devaluation May Not Be So Catastrophic

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Nov. 20 2020, Updated 3:16 p.m. ET

As for the renminbi, a currency that speculators loved because it was so predictable, policymakers are not devaluing their way out of a crisis. This is because if they were to embark upon such a course, the scale of the devaluation would need to be in the order of 20% to 30%. The currency has weakened 2% to 3% against the dollar since August 11.

The renminbi has actually been one of the strongest currencies over the past five years, in both nominal and real effective exchange rate (or REER) terms. In the grand scheme of things, we believe a 3% move is neither here nor there.

Market Realist – The above graph shows how the Chinese yuan has held steady over the past five years. Chinese yuan devaluation took the Asian (AIA) (FAX) and global markets (ACWX) (FCO) by surprise, increasing speculation about a pronounced slowdown in the Chinese economy (ASHR).

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The reason for the move isn’t to help exporters or indulge in competitive devaluation to spur growth but to control the pace of appreciation against other trade-weighted currencies. As discussed above, a competitive devaluation would have meant a devaluation by almost 20% to 40%. The 2% to 3% devaluation is only a nod to controlling the currency’s pace of appreciation.

Moreover, one of the main reasons for the yuan’s devaluation was to gain the IMF’s acceptance of the currency. The IMF has now recognized the Chinese renminbi as one of its reserve currencies—a status that had been enjoyed only by the US dollar, the UK pound, the euro, and the yen. The decision will come into effect in October 2016.

There are likely to be winners and losers in the aftermath of the yuan devaluation. Retail stores like Walmart (WMT) and Target (TGT) could benefit as wholesalers importing from China pass on the price benefits to retail giants. Toy manufacturers like Mattel (MAT), which source more than 70% of their products from China, could benefit from the lower prices as well (Source: Business.com).

Yuan devaluation may sway the macro environment in the short term, but its long-term effects are limited.

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