China’s currency fell further Wednesday, keeping global investors on edge. But the rest of the world would face an even bigger headache.
Some analysts said China’s currency moves could result in the Federal Reserve pushing back the date of its first interest rate rise, which many had expected next month. “China risk” has dampened hopes for a September rate hike and upcoming data could further chip away at expectations for a Fed tightening”, said Junichi Ishikawa, market analyst at IG Securities in Tokyo. “Over the last few years, the yuan has appreciated the dollar and the dollar has appreciated against just about anything in the world”, he said, noting the Chinese currency’s move is relatively small and appears justified. “There is no reason for that relationship to have changed”.
Outwardly at least, the move has been explained as a key reform that allows the market to steer the currency’s value.
The best America can do is to try to understand, and for U.S. leaders to express that understanding quietly, for both their American and the Chinese audiences. In the previous two days, the central rate – around which the yuan is allowed to trade in a band of plus or minus two per cent – had been marked 1.9 and 1.6 per cent lower, respectively. That exodus has held down the yuan’s value. But many economists say that number is vastly overstated.
Fortunately for Korea, though, the current situation can lead to at least some improvement in profitability on the part of exporters because steel sheets, precision chemical materials, and raw materials such as coal and non-metallic minerals can be imported at lower prices. Signs of trouble are accumulating.
Greater China accounts for 27 percent of Apple’s iPhone sales.
Vice-governor Yi said China would quicken the opening of its foreign exchange market and would attract more foreign investors as it liberalises its financial markets.
Finally, the Chinese devaluation complicates the Fed’s decision-making.
Meanwhile, central bank adviser Huang Yiping told Bloomberg that China is unlikely to permit a sharp yuan depreciation and retains the ability to support the currency. The Fed has kept the rate at zero since December 2008. Australia is vulnerable to any downturn in China’s economic growth and demand for raw materials, especially for our biggest export, iron ore.
The pan-European FTSEurofirst 300 index and the eurozone’s blue-chip Euro STOXX 50 index fell 2.7 percent and 3.4 per cent, respectively.