Chinese Yuan

The Chinese stock market crash in early 2015 saw the market value of its major indices tumble. On August 24th, Chinese markets lost almost 10% of their value which triggered panic in the American and European markets. From a longer term perspective, the Chinese stock market has lost almost 50% of its value from this time last year. The lack of transparency of Chinese economic data led foreign investors to avoid the country. Free market reforms and questions with regards to the actual rather than the perceived strength of the Chinese economy had the potential to have long lasting effects on Chinese growth. China’s economic growth in 2015 was down to 6.9% from 7.3% in 2014. Chinese first quarter growth this year was 6.7% down from 6.8% the previous quarter.

It has been suggested that an effective way to maintain or even improve growth rates in China would be to devalue the Yuan. Early 2016 saw CNY/USD appreciate to 0.1555 from a low of 0.1520, before a trend reversal at the end of April. The main argument against a devaluation of the Yuan is that it will negatively impact domestic consumption. Although China is not growing at an extent seen in the early years of its development, it is still experiencing considerable growth and it still maintains a current account surplus. A devaluation of the Yuan theoretically should help to increase exports, but this is of less importance to Chinese policy makers who want Chinese growth to be driven by domestic consumption and services and not exports.

In November last year, China joined the IMF’s Special Drawing Rights basket of reserve currencies. This means that the currency is measured against a basket of currencies which adds stability and reduces the risk of the peg to the US Dollar.

The risk of a currency devaluation is largely unreasonable. The main drivers of Chinese economic growth will be its willingness and capability to implement structural reforms, communication about its economic policy and social reforms.

 

Picture from Adrian Korte, via Flickr

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Reuters: Business News

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