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China Devalues its Currency
Aug 13, 2015

China, in a surprise move, devalued the Yuan after a run of poor economic data. The Chinese central bank described the move as a one-off depreciation of nearly 2 per cent. The problem with China is structural. Chinese growth is going to slow down on a structural basis on the back of their demographics, the excess capacity in the manufacturing sector and global backdrop remaining quite weak. 

Main Reasons why China is doing so

  1. China tightly controls the value of its currency by setting a daily rate for the Yuan versus the dollar. In China’s domestic market, traders are allowed to push the Yuan 2% stronger or weaker for the day. But the People’s Bank of China (PBOC) often ignores those market signals when it sets the next day’s rate, sometimes setting the Yuan stronger versus the dollar when the market is signaling it sees the Yuan as weaker. The central bank said it will now take the previous day’s trading into account.

  2. PBOC said it wants to bring the Yuan more in line with the market. But the move also comes as China’s important export sector has weakened and overall economic growth looks sluggish. Over the weekend, Chinese exports in July fell 8.3 per cent compared with a year ago. A weaker currency helps China’s exporters sell their goods abroad.

  3. The most immediate effect is that it signals to the world that China thinks the Chinese economy is sputtering. The move suggests China is looking for ways to get it going again. But it also has major implications for the U.S. and other countries that trade with China because it puts their companies at a disadvantage. 

  4. The move puts pressure on other central banks around the world to push down their own currencies to help their own exporters and to prevent destabilizing capital flows. The move could hurt commodities markets because it signals potential weak demand from China. It could also accelerate capital outflows out of China, especially if investors expect further devaluations.


It could complicate China’s efforts to get the Yuan added to a basket of currencies tracked by the International Monetary Fund—efforts aimed at giving the Yuan greater acceptance abroad. Longer-term, the move raises questions about China’s pledge to liberalize its economy. On one hand, making the Yuan more market-driven is a step in that direction. But the move also appears to be designed to help exporters, at a time when China has been looking for other, more dependable sources of growth.

  • Right now, the Rupee is moving between 63.50 and 64 and would certainly jump. Obviously, it is directly linked to the event. The very fact that China had to do this means that they are signalling about a problem.

  • The value of the Chinese currency is not going to drive the value of the Rupee, but it is sentimental. Given the fact that the global situation is not completely comfortable, there is a lot of nervousness in the world.   So people have been worried about China.

  • Exports all over the world have not been rising. China has in fact been falling, and only three or four countries have seen rising exports. China has acknowledged that they have a problem, which is going to precipitate across the board.


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