yuan devaluation | The yuan's decline underscores China's delicate balancing act

The yuan’s decline underscores China’s delicate balancing act

December 10, 2015 1:23 PM (UTC+8)

 

In light of the Chinese currency falling Tuesday to its lowest level in four years on a big drop in China’s November exports, the Financial Times writes that people should lose the illusion that the yuan’s entry into the International Monetary Fund’s special drawing rights basket was an attempt to prevent it from speculative attacks.

The point it is, the Chinese government isn’t trying to deliberately devalue its currency, but rather the market is because it thinks the yuan is overvalued.

china-yuanThe FT acknowledges that China is in the midst of a difficult balancing act between short-term growth and long-term stability as it shifts from an economy led by investment and exports to one driven by domestic and especially consumer demand.

While external events such as slowdown in global export demand, and a sell-off of emerging market currencies have lowered the first side of the equation, domestic demand remains anemic.

The FT gives China the benefit of the doubt when it says the August devaluation of the yuan wasn’t a move to deliberately manipulate the market and boost manufacturing exports. Rather, the fall in the currency accompanied by a rapid decline in foreign exchange reserves is evidence of policymakers trying to manage a devaluation rather than engineering one, said FT.

On the positive side, signs show domestic demand may be responding to moves by the People’s Bank of China such as multiple cuts in interest rates and reductions in banks’ reserve requirement ratios. Although imports fell 8.7% in dollar terms last month on a year earlier, the fall was smaller than expected, suggesting stronger demand sucking in goods from abroad.

Still, the China remains in an unenviable position. It showed great growth for decades because of supportive external conditions it had no control over: buoyant demand and rapid capital inflows

Now, as it looks for economic growth from an area it has much less control over, external factors aren’t favorable. Right now, it needs to prepare for a rise in borrowing costs as the US Federal Reserve Bank contemplates raising interest rates next week.

As China finds its ability to maneuver reduced by weak global demand and skittish investors, the FT says Beijing will need luck as well as judgment to continue the process of transitioning its economy without taking a body blow.

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