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Tuesday, February 20, 2018

Global markets are anxiously looking at the devaluation of the yuan


Despite the assurances of the participation in the so-called currency wars, China continues to do just that. Although regular lows, which shows the exchange rate of the yuan to the dollar, looks a little alarmed global markets. But in fact, from China’s currency policy depend on the fundamentals of the world economy.

The Renminbi against the U.S. dollar on Monday hit a six-year low after China’s Central Bank lowered its another 0.2%. The regulator set the average exchange rate of the yuan to the dollar at around 6,7690, which is 132 points above the fixing on Friday, when the rate was 6,7558.

“China advance gradually weakens the yuan, to show US that a sharp change in the monetary policy of the fed for it is not desirable”

The course of offshore Renminbi (Chinese national currency, trades which are made outside mainland China) on Monday, also fell to its lowest level in history paired with the US dollar to 6,7869 per dollar. This at least 2010, when the accounting index.

The Chinese authorities constantly claim that the reason for a further depreciation of the Chinese currency not. Just last week this was stated by the official representative of Hostetler China Shen Liuni. The recent devaluation of the yuan, he explained external factors. However, despite the official words of Beijing, the devaluation of the Chinese currency continues right now.

For the first time this process began in August of 2015, when the rate was lowered from 6.2 to 6.4 yuan per dollar. Then Beijing also insisted that the currency stabilizes. In fact, since then, there have been three more waves of devaluation – at the end of 2015, in July this year, and October is observed the third stage. The Chinese currency has fallen almost 4% since the beginning of the year.

Currency war China important to the world market. If you recall, last year the devaluation of the yuan in August on 3% has fallen off a number of indices for 1000 points, the world markets started to panic. Many are talking about that China will provoke a new global crisis. A major shake-up was observed in January this year, after another round of weakening of the yuan.

However, the current devaluation markets perceive relatively quiet. The reason is that, despite official assurances of Beijing, the economists knew that the planned devaluation of the Chinese currency. Plus this time it is not so fast.

“At the end of last week the pair USD/CNH has updated the maximum that was achieved on 6 January this year. Then the RMB devaluation took place very quickly, which led to the correction of all the world’s playgrounds. Now at a much more gradual decline in the course of the same levels no one is afraid of – the US market about their absolute highs, and European – approximately per annum”, – explains Igor Klyushev of IR “freedom Finance”.

“With the lows of the year in April, the dollar against the yuan has increased by almost 5% is noticeable movement. For 2015, there was a decrease in the Chinese currency by about 7%. But if the movement is smooth, then the markets it’s scary not much,” he adds.

What is surprising is that at the current volume of China’s economy, its growth rate and the size of the gold reserves, the yuan is likely to strengthen, but he is tightly controlled by the Bank of China, says Yuri Arkhangelsk from “KIT Finance Broker”. The Chinese authorities all the time promise to make the exchange rate more market-based, to stop the devaluation, but this is not happening, as it is unprofitable to China, he adds.

China is trying to bet on the growth of domestic market and consumption, but it is not working. In China continues the old model of economic growth through investment and exports. A devaluation should help exports and maintaining foreign exchange reserves.

“China tries to solve the problem of a slowing economy due to the weakening of the yuan. Do not forget about verbal intervention. However, a sharp drop in the yuan could cause a collapse of the financial markets, so the Chinese authorities are cautious,” says Elena Shishkina of IR “Zerich capital Management”.

In addition, thus, Beijing is trying to keep the fed from tightening monetary policy. “As most experts are inclined to think that the fed will raise rates in December, China advance gradually weakens the yuan, to show that a sharp change in the monetary policy of the fed for it is not desirable,” – said Shishkin.

In other words, Beijing continues global currency war. “The rest of the participants of the world market will have to devalue their currency following or impose duties on goods from China, will need to protect their exports and production,” says Archangel.

So, Europe and Japan on China will continue monetary stimulus, lowering rates, and the US, on the contrary, won’t rush to raise rates.

In the Wake of such a currency war could break out and shopping. The volume of international trade China is a significant 11%. For comparison, the U.S. share is 10%. The cheaper becomes the yuan against the dollar, the more chances you have of Chinese products to compete with American, European, or other goods. Other countries to retain their export, have to get involved in currency and trade wars waged by Beijing. For example, is now actively fighting for the European market between China and the United States. China is struggling through currency wars and the U.S. – by promoting plans for a Transatlantic partnership that will open U.S. door products to the European market.

“Russia is such a currency and trade war between the US and China junk. If the global economy starts to slow down, the demand for raw materials will fall,” – said Shishkin. However, for those Russian companies borrow in yuan, this factor is positive, as it will be easier to service loans in the Chinese currency.

While the market believed that China Central Bank is pursuing a managed devaluation, it controls the yuan exchange rate and sudden movements will not. However, there is a risk that Beijing may lose control over the currency market – or indeed already lost it, just cleverly hides it. Or plan of China just is to to let the yuan, and not to interfere. All this is extremely dangerous scenarios that can shoot in the next few months. The consequences for the global economy can be sad, as this will trigger a massive devaluation in the developed countries and the new world crisis.

Why there is doubt about the fact that Beijing controls the devaluation, as they say? Because often the official lyrics are not confirmed. For example, the devaluation of the yuan makes Chinese poorer, which means they will consume less. And it completely goes against the economic policies of China on reforming the old model of investment and export growth to economic growth through domestic consumption. To achieve this goal, on the contrary, a strong national currency.

In practice, China’s economy remains dependent on exports and investment. The stimulation of exports due to the devaluation eventually leads to currency and trade wars. Investment incentives – to the credit problems in China, especially in the corporate sector. Beijing supports investment due to the growth of the debt. In the case of a sharp rise in overdue loans it will be a serious crisis in China. And after a hard landing of the Chinese economy will have a negative impact on the economies of developed countries.

It is worth Recalling that China remains the largest foreign holder of U.S. debt, and accounts for half of the total U.S. trade deficit. Not to mention the fact that China is the largest importer of raw materials, and thus China’s problems with energy demand even more can derail oil prices, followed by commodity economy, including Russian.

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