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5 things about the Chinese Devaluation
The devaluation Tuesday was the most significant downward adjustment to the yuan since 1994, when as part of a break from Communist state planning, Beijing let the currency fall by one- third.
Goldman breaks down the geographic slowdown (Year on Year Data) US Exports Fell 1.3% down from the +12.0% Japan Exports Fell 13.0% in July, vs -6.0% Euro Exports Fell 12.3% vs -3.4% Hong Kong Exports 14.9% vs -0.5%
#1 What did China do? In China’s domestic market, traders are allowed to push the yuan 2% stronger or weaker for the day. But the People’s Bank of China often ignores those market signals when it sets the next day’s rate.
#2 Why did China do it? In its statement, the PBOC said it wants to bring the yuan more in line with the market. But the move also comes as China’s important export sector has weakened. A weaker currency helps China’s exporters sell their goods abroad.
#3 What does this mean for the rest of the world? The most immediate effect is that it signals to the world that Beijing thinks the Chinese economy is sputtering. In the U.S., it will likely reignite criticism that Beijing keeps the currency artificially low to help its own manufacturers.
#4 What does this mean for markets? The move puts pressure on other central banks around the world to push down their own currencies to help their own exporters and to prevent destabilizing capital flows.
#5 What’s next? Longer-term, the move raises questions about Beijing’s pledge to liberalize its economy. But the move also appears to be designed to help exporters, at a time when China has been looking for other, more dependable sources of growth.
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