China In Your Hands

 

There have been some huge ripples over the past 10 days as China has taken action to make itself appear more sexy to……well, errrrr….itself. And just to clarify, sexy in an economic context (should such a thing exist!).

 

Why the ripples? That’s an interesting one.

 

China devalued its currency against the US $ by 1.9% which is a tiny devaluation in the grand scheme of things. In reality, the devaluation is unlikely to have an immediate effect on exports and it is hardly anywhere near a ‘proper’ devaluation of 20 - 30%.

 

Perhaps the bigger question we should be asking is why now?

 

China has been under international pressure to allow its currency to be driven by market forces (that old chestnut of ‘demand’ and ‘supply’) as opposed to being set by the Governments. The US has been its biggest critic saying that Beijing keeps the currency artificially low to help boost their exports.

 

So in theory, China says it is doing what the US and the international community wants and allow the Yuan's value to be more flexible. This has already got it a nod of approval from the International Monetary Fund (IMF) which overnight said China's new mechanism for setting the daily reference rate for the Yuan was a "welcome step".

 

You see, China wants to enter the IMF's elite global currency club……something it can't do without more of a market driven exchange rate.

 

In theory - the US should have welcomed this move too but the US Treasury said: "We will continue to monitor how these changes are implemented and continue to press China on the pace of its reforms. Any reversal in reforms would be a troubling development."

 

So let's go back to that key question……why did China devalue its currency now and allow for market forces to play more of a role now?

 

Well, some economists say the timing of the depreciation appears to be far too sudden and a kneejerk reaction to their weaker than expected export figures (recent figures showed a slump of more than 8% from last year). Analysts fear that Chinese officials are clearly concerned about the fact that rebalancing their economy and moving from exports to consumption is taking longer than they expected.

 

The reality is that rebalancing takes time - but it appears that it may be taking too long for Chinese officials to allow the economy to re-engineer itself.

 

Whether all of this justifies the ripples the devaluing has caused, is down to opinion. But one thing is for sure, China has ruffled US feathers.