If the yuan keeps falling, that is.
Chinese officials say the move will mean the yuan will partly reflect market fluctuations while still remaining linked to the dollar. Perhaps the Chinese economy is decelerating even faster than anyone realizes. Growth for 2015 is expected to be the slowest since 1990. Chinese people, anxious about the economy and seeking investment opportunities overseas, have been pulling money out of the country.
Global stocks sank Wednesday as China let its currency fall for a second day following a surprise devaluation that rattled global financial markets.
Investors globally reacted harshly, dumping shares of companies with significant amounts of revenue derived from China, particularly automakers and luxury goods makers. Few doubt that China would intervene if necessary. The Aussie, widely considered a proxy for China plays, was last down 0.9 percent at $0.7234, after plunging as low as $0.7217.
Shares in Yum! Brands Inc., for instance, have sunk almost 9 percent the past two days, The parent company of KFC and Pizza Hut, it has 6,800 restaurants in China and plans least 700 more this year.
Beijing must change its exchange rate policy in order to achieve its broader objective of increasing China’s stature in the global financial system.
The devaluation was condemned by U.S. lawmakers from both parties on Tuesday as a grab for an unfair export advantage and could set the stage for testy talks when Chinese President Xi Jinping visits Washington next month given acrimony over issues ranging from cybersecurity to Beijing’s territorial ambitions.
However, the Chinese economy is at a crossroads.
In Germany, economists are mainly shrugging off the likely impact on local exporters. Still, most economists suspect the yuan’s drop won’t have much of a lasting impact.
Chris Carter, portfolio manager of the $442 million Buffalo Growth Fund, meanwhile, said he has sold some auto parts suppliers that do a lot of business in China, though he declined to name them.
“Many of the Chinese government statistics are of dubious value”. But the economic slowdown is taking a toll.
THE QUOTE: “Markets were not expecting any major moves on the currency from the Chinese government, despite its benefits, as the risks were perceived as too high”.
Yu says the falling value of the New Taiwan dollar, which has dropped about two percent since Monday in tandem with the renminbi, will make it cheaper for him to buy resins for his products, as well as finished goods from that country.
But it’s unlikely to take its place alongside the world’s most traded currencies quite yet, as China is still reluctant to enact numerous reforms that would make the yuan freely convertible.
China’s economic rise has lifted global tourism.
The sharp recovery could be attributed to bargain hunting from an oversold position – particularly in the energy sector – as well as traders becoming more confident the Fed will hold rates steady in September.
BONDS, CURRENCIES: U.S. government bonds rose, sending the yield on the 10-year Treasury down to 2.13 percent from 2.14 percent the day before. A key question for investors is how the People’s Bank of China’s unexpected move might affect the timing of the U.S. Federal Reserve’s long-awaited increase in interest rates, which many believe could still come as early as next month, given improving U.S. economic data. Will the yuan’s drop cause Fed policymakers to reconsider? The Nasdaq composite wound up with a gain of seven points, or 0.2 percent, at 5,044.
“A deliberate attempt to lower the currency is indeed currency warfare”, said Oxford Economics director Gabriel Stein.
