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Here’s Why China’s Yuan Devaluation Is Such A Big Deal



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Aug 12 2015
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By now, you should know why we had screamed “The Chinese Are Coming!!” about three weeks ago. That’s because the China’s economy is crashing, for real. Xi Jinping administration has been fire fighting ever since the terrifying 30% crash within 3-weeks in the country’s stock market.

China Stock Market - Investor Looking Dejected

It certainly doesn’t help if the allegations about internal sabotage are true. President Xi Jinping’s number 1 enemy – former leader Jiang Zemin – was allegedly trying to create trouble by instructing his financial red army to systematically selling their shares. The Government of China is now drilling into each account suspected of such selling.

 

But that isn’t the real problem. The real problem is China’s economy has stopped growing. The real problem is it’s very hard for graduates to find jobs in China. The real problem is nobody wants to work but play the stock market. The real problem is the real growth was merely at 4-5%, instead of the 7% claimed by the Chinese government.

China Stock Market - College University Investing Stocks

If the government doesn’t do anything, the stock and property market will collapse. Millions would be made jobless and there’ll be blood on the street. So, what did China do to solve the problems? The answer – devalue their currency. The surprise devaluation of China Yuan or Renminbi is certainly an admission of economic weakness.

 

When the People’s Bank of China made the move yesterday, it said the move was a “one-time” depreciation of almost 2% against the U.S. dollar. The plan was to manually weaken the Yuan to levels last seen 3-years ago. Yes, it was kind of a “cheat” way to boost the country’s export and economy by making their goods look “cheap”.

Stakes of Chinese Yuan Currencies

However, the biggest one-day fall since a massive devaluation in 1994 has also created chaos around the world. But those are not of China’s concern, especially when the country’s export plunged by an unexpectedly huge margin of 8.3% in July. What is of paramount importance is to increase exports to its major trading partners – Korea, Japan, Germany and U.S.

US Dollar Against Malaysia Ringgit - 12Aug2015US Dollar Against Singapore Dollar - 12Aug2015

Gone was the day when the Chinese Yuan was treated with little respect. Today, when the Yuan tumbled, the currencies in the rest of the region went down accordingly. Korean won, Singapore dollar, Australian dollar, Malaysian ringgit, Indonesia rupiah, Thai baht and Philippines peso all sank like the Titanic.

US Dollar Against Indonesia Rupiah - 12Aug2015US Dollar Against Thai Baht - 12Aug2015US Dollar Against Philippines Peso - 12Aug2015

Still, there’s a question of whether there would be more of such devaluation going forward. Sure, the Chinese said there isn’t. But what if the China’s economy continues to slump? Would President Xi Jinping do nothing just because they had promised not to devalue again? Chances are: they won’t care and would devalue whenever they like.

 

Now that the Yuan has been weakened artificially, all eyes will be on U.S. Federal Reserve. Will they continue to raise its rate this September (next month), or would shelve it pending more economic reports and data? Continued dollar strength is problematic for the Fed since it hurts U.S. exports, lowers inflation and dampens corporate profits.

Girl Standing in Front of Giant China Yuan Note

If the Fed proceeds to raise the much awaited interest rate, the dollar would certainly be pushed up hence making exports even much harder. Already, presidential candidate Donald Trump said China’s devaluation of the Yuan would be “devastating” for the United States. So, the real problem is not even the 2% Yuan devaluation. The real problem is whether China will continue to devalue until they get it right.

 

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Comments

It is a blessing that China devalued it Yuan, it will stop currency manipulators to stop at its steps. We can see RM is consistently attacked in fact it is ripe for a huge reaping like in 1998, such move by China helped Malaysia and withdraw their attention on RM and I think US will stall its rate hike. Asean especially Malaysia has China to thank for this stabilising effect.

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