Tuesday, August 11, 2015

Will the China Devaluation Rescue the Stock Market?

China loosened controls on its currency today leading to a surprise sharp decline. This has the effect of a currency devaluation and is being widely characterized as such. A currency devaluation is by nature inflationary because the prices of imports go up. At the same time, it can make exports of manufactured products more competitive by lowering prices of everything exported from the country. That seems like a sensible strategy from the leading manufacturing country at a time when the prices of its largest imports, especially fossil fuels, are unusually low.

The currency move must also be seen in terms of the stock market. For a country committed to stop its stock market crash by any means necessary, inflation cannot be far away, and a currency devaluation is a logical step in that direction. The lower yuan will boost exports in the short run, though it won’t have much impact in the long run. Inflation will threaten the yuan’s status as a reserve currency, and the increase in prices for imports puts more pressure on China to attain energy self-sufficiency sooner, but these are problems for another day.

A Reuters story on the devaluation and its effect on global markets:

A different take and a different set of worries in a Q&A at Financial Times:

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