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What is behind China’s sudden devaluation of its currency?

On August 11, 2015 and in midst of a weakening economy, China loosened the yuan’s peg to the US dollar allowing a 3% devaluation through a three-day period.1 Although a single digits fluctuation may seem normal for other currencies, this move by the People’s Bank of China is the biggest drop of yuan since 1994.2 Consequently, widespread speculation continues to ensue as to the true intention behind China’s startling move.

 

The slowing Chinese economy is an obvious catalyst for the sudden devaluation.3 Boasting a 7% growth rate in both first and second quarters, the Chinese economy is growing at the slowest pace since 2009. More importantly, the Chinese exports plunged 8.3% in July compared with 2014, far worse than the expected 1.5%.4 Indeed, when Prime Minister Li Keqiang convened the cabinet in July, fixing the export problem was high on the agenda.5 Many economists thus saw the devaluation as a move to join a “low-intensity currency war” following Japan’s decision to soften the yen in an effort to make Japanese exports more competitive.6

 

Although a depreciated yuan could potentially help China to boost its exports, it may not have been China’s true intention. Some economists rejected the spur-exports view, arguing that weak global demand meant little benefit in driving the currency lower.7 Nick Lardy—a China expert at the Peterson Institute for International Economics—commented that “if they [China] wanted to revert to their mercantilist trade policies, they would have moved sooner and they would have moved by a much bigger amount.”8 Many experts actually viewed the depreciation as Beijing officially presented it, which was to “enhance the market-orientation and benchmark status of central parity.”9

 

Moreover, the move may be another push by Beijing’s to get the yuan into the basket of the reserve currencies of International Monetary Fund’s special drawing rights (SDR).10 Getting the yuan into the SDR not only symbolizes the country’s status as a global power, but would also help the country flex its muscles in the world economy.11 Despite concerns of financial risk, China has kept a tight grip on its currency and also pledged to move towards more flexibility.12 Thus loosening the currency’s tight link with the dollar will not only fit within China’s promise to the US to limit currency intervention, but also bolster China’s bid to get the yuan into SDR when the IMF board votes in November.13


  1. David Malpass, China Declares Currency Independence, WALL ST. J. (Aug. 14, 2015, 6:51 PM), http://www.wsj.com/articles/china-declares-currency-independence-1439592672

  2. Keith Bradsher, China Turned to Risky Devaluation as Export Machine Stalled, N.Y. TIMES (Aug. 17, 2015), http://www.nytimes.com/2015/08/18/business/international/chinas-devaluation-of-its-currency-was-a-call-to-action.html

  3. Patrick McGee, Q&A: China’s currency devaluation, FIN. TIMES (Aug. 11, 2015, 9:06 AM), http://www.ft.com/intl/cms/s/2/b94b1178-3ffa-11e5-9abe-5b335da3a90e.html#axzz3lWtaPi8r

  4. Id. 

  5. Bradsher, supra note 2. 

  6. Jane Cai and Kwong Man-ki, Beijing urged to be transparent with its financial decisions in light of market turmoil, S. CHINA MORNING POST (Sept. 9, 2015, 11:39PM), http://www.scmp.com/news/china/policies-politics/article/1856819/beijing-urged-take-transparent-approach-financial

  7. Phillip Inman, China plays down devaluation fears as yuan cut for third straight day, GUARDIAN (Aug. 13, 2015, 3:07 AM), http://www.theguardian.com/business/2015/aug/13/china-plays-down-devaluation-fears-as-yuan-cut-for-third-straight-day

  8. Malpass, supra note 1. 

  9. The People’s Bank of China, “The PBC Announcement on Improving Quotation of the Central Parity of RMB against US Dollar”, (Aug. 11, 2015), http://www.pbc.gov.cn/english/130721/2941603/index.html; Malpass, supra note 1. 

  10. Phillip Inman, China ends three days of yuan devaluation, GUARDIAN (Aug 14, 2015, 5:24 AM), http://www.theguardian.com/business/2015/aug/14/china-halts-yuan-devaluation-with-slight-official-rise-against-us-dollar

  11. Malpass, supra note 1. 

  12. Inman, supra note 10. 

  13. Malpass, supra note 1. 

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