Overnight, the People’s Bank of China devalued the yuan after a consistent fall in export by more than 8%. The yuan dropped over 1.9% against the US dollar, the biggest drop since 2005. It should be remembered that the yuan has been really strong over the past years against the USD dollar.
The need to devalue the currency comes on the back of consistent falls in export. The motive of the devaluation is basically to boost the Chinese economy. This will have a direct impact on Chinese goods abroad by making it affordable at a relatively cheaper price and imported goods will become more expensive.
China is currently the second largest economy in the world; this will have a great impact on the global economy as it might lead to deflation export. This will likely affect the decision of major central banks regarding rate hikes. It should be noted that The Federal Reserve is data dependent and currently has an inflation target of 2% just as the Bank of England.
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The Chinese yuan is not the only thing that has dropped so far in China. The Shanghai Composite saw its biggest drop of 8.5% on July 27 after a record gain of 150% earlier this year. The Shanghai Composite is composed of more than 85% retail investors compared to the other major markets with more institutional investors.
However, the biggest challenge to the market is the fact that the Chinese government consistently intervenes in the market. The market forces of demand and supply are not given the free will to play. The government intervened in the stock market by putting an embargo on short orders in the market and now the government has just intervened again by devaluing the currency.
This is more of an issue to be worried about. We should also be worried about what the Chinese government is actually trying to achieve because recent data shows that currently China has the highest gold reserve. Is there something to be worried about? Time shall tell.