After devaluing the yuan for a third day, the People’s Bank of China (PBOC) called an extremely rare and urgent press conference. But because the yuan was tied to a rising U.S. dollar, it remained at high levels. As emerging market currencies slide, exporting “waves of deflation to the West”, said Albert Edwards of Societe Generale, they will overwhelm lacklustre developed world profitability, taking us back to “outright recession”. Even if the Chinese government liberalizes the foreign exchange market and gives up capital flow control, which direction the yuan would ultimately go is hard to say. The bank can not intervene with this, but focuses more on improving the exchange rate formation mechanism. Beijing said the change was aimed at making the tightly controlled currency more market-oriented. Rumours that Beijing was seeking a 10 per cent devaluation of the yuan were described as “sheer nonsense” and “totally unfounded” by deputy governor Yi Gang.
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.
Airline operators rebounded, after tumbling over the past two days amid fears that a weaker currency would hurt the bottom lines of Chinese carriers.
Last weekend, data showed an 8.3 percent drop in exports in July and that producer prices were well into their fourth year of deflation.
It could also restrain U.S. economic growth, as American exports to China take a hit, which may get the U.S. Federal Reserve to think twice about hiking interest rates in September, Beauchamp said. On Wednesday, Vietnam allowed its currency to weaken in response to China’s move. Today’s devaluation could affect orders delivered next year, but that is unlikely to quickly counter current sources of weakness in the Chinese economy.
The dollar’s strength together with loss Japanese monetary policy has meant that since mid-2012 the yuan is 60% stronger than the Japanese yen, the currency of a country which which it competes fiercely for exports. The Fed has kept the rate at zero since December 2008. It also lowers inflation, already running below the Fed’s 2 percent annual target. Overall, the sentiment was risk-retreating as many analysts believed that Chinese technocrats were covering up economic data that was worse than has been reported.