On August 11, 2015, The Chinese central bank suddenly devalued its currency by 2% against the dollar, sparking the largest single move since 1994. Two days later, the value of renminbi depreciated over 4.6%, reporting 6.4010 yuan per dollar.
The Chinese currency is controlled by a mixture of market forces and government decree. Every morning, The People’s Bank Of China, China’s central bank Beijing sets a target of Yuan against the U.S. Dollar and then allows investors to trade. The large drop this time terrified not only Chinese investors, but also economists and politicians around the world.
The Chinese central bank placated the public, saying this change was a “one-time” event .Many analysts anticipate that this event is likely to stimulate exports and boost economic growth, since the devaluation of renminbi makes Chinese exports cheaper. China, in fact, has faced a recent slump. According to data released last month, the Chinese economy slowed to 7% year-over-year growth in the first quarter, the slowest pace in six years, along with exports plummeting 8.3% year-over-year in July.
However, the devaluation of Chinese currency is not simply a domestic event – it stirs up the entire world economy.
One of the consequences is that cheaper Yuan brings more competition to China’s other neighbouring exporting countries, which could become “collateral damage” in a global race to the bottom. Under such spur, Thailand, the Philippines, Malaysia, Indonesia, South Korea, Singapore and even Australia devalue their currencies at the same day.
Three consecutive days of devaluation pummeled global stocks– it collapsed as it experienced an earthquake. The American stock index (The Dow Jones Industrial Average) fell 1.2% to 17402.84, taking with it much of its past session’s gains, while other European and global index (The S&P 500, the pan-European Stoxx Europe 600 Index, and the Nasdaq Composite) all fell more than 1%.
Shares of luxury-goods firms, car makers, and mining companies, all companies highly dependant on demand from China, were hurt the hardest. Mining corporation Freeport McMoRan Inc. tumbled over 12% and LVMH Moët Hennessy Louis Vuitton SE, in Europe, dropped 5.5%. Shares of Apple Inc., which has a major market in China, fell 5.2% to $113.49, its lowest closing price since January.
Viewing the devaluation with trepidation, some perceived this event as being the start of a new round of global currency warfare. Republican presidential candidate Donald Trump had this to say about the Chinese: “They’re destroying us. They keep devaluing their currency until they get it right. They’re doing a big cut in the yuan, and that’s going to be devastating for us.”
The currency war theory must be an exaggeration because both exchange and stock markets is leveling out over the past month. More importantly, as Ma Jun, the chief economist of the People’s Bank of China, said: “China has no intention or need to participate in a currency war” at all.
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