Wednesday, August 12, 2015

Another Day, Another Devaluation

Yesterday’s “one-time depreciation” of China’s currency was repeated today, and global markets are nearly as shocked by today’s 1.6 percent move down as they were by yesterday’s 1.9 percent. The positive side of this, as reflected in this morning’s reports, is China’s commitment to follow the currency markets instead of trying to keep them inside the box. The negative side is that China’s national economy is far weaker than analysts imagined. It was less than two months ago that we saw the first inkling that the manufacturing sector in China might actually be declining, and of course no one took that initial indication seriously. Now there is every reason to believe Chinese manufacturing is in a slump, and the question is whether there is anything the government can do to stop it. After two months of negative indicators, the summary today from Bloomberg (at Japan Times) has set aside any skepticism about the downturn:

Weaker-than-expected reports Wednesday on Chinese industrial output and retail sales in July lowered the outlook for the economy, putting additional downward pressure on an already weakening currency.

If a 2 percent devaluation would be barely noticeable, 4 percent is certainly enough to spark inflation in China and boost sales of its manufactured goods worldwide, and both moves should eventually help bolster the stock market. Today, though, fears that China’s economic growth has come to a stop are dominating. The stock rally of last week is over.

Update: Weak traffic at Alibaba may be another sign of stalling industrial activity.

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