The Downward Spiral of the Chinese Yuan

The Downward Spiral of the Chinese Yuan

China is known to be a very powerful player when it comes to the global economy. The country’s strong influence on developing and developed countries around the world continues to be closely monitored by local, national and international experts.  Currently, the country’s economic impact is being felt overseas.

As reported by CNBC and other media outlets, on Thursday, October 27, 2016, the Chinese yuan experienced its biggest fall in five months. After a mere twenty-nine minutes, trading in China’s stock markets was suspended. Naturally, this created a lot of fearful noise across the world.

According to CNBC, “The problem is that most outside traders consider the yuan to be more than 10 percent overvalued against the U.S. dollar” (http://cnb.cx/1PMib5m).  China’s domestic economy could be potentially devastated if the market does take the exchange rate to that value (http://cnb.cx/1PMib5m).  Yet, since the yuan is a global currency, it would be very difficult and quite expensive to fight the market (http://cnb.cx/1PMib5m). 

Jonathan Fenby, China Director, Trusted Sources claims that China’s leadership hoped to offer some amount of currency reform while maintaining stability, yet controlling the process continues to be difficult (http://cnb.cx/1PMib5m).

As shown in the CNBC report, Alberto Ades, Bank of American Merrrill Lynch, states in a televised interview, “Thursday showed the biggest lost of reserves since August-$108 billion dollars worth of reserves losses and $19 billion dollars worth of evaluation changes” (http://cnb.cx/1PMib5m). They lost “127 billions dollars of reserves in one month, with continuing outflow” (http://cnb.cx/1PMib5m).

It is important to note any market-led depreciation may create a “domino effect” worldwide (http://cnb.cx/1PMib5m). As CNBC reports, “other countries could be forced to lower the value of their own currencies to remain competitive with China. The U.S. dollar would then spike on a relative basis, and that would in turn swell the value of dollar-denominated commodities and corporate debt — which would likely grind global growth to a halt” (http://cnb.cx/1PMib5m).

As expected, Chinese officials are closely monitoring the situation. According to Global Times, “the public panic over the yuan's recent depreciation should be quelled, as two-way fluctuations of the Chinese currency are within the expectations of government authorities and are quite normal within a market-oriented mechanism” (http://bit.ly/2elKMkS).   The same report also states, “the recent depreciation of the yuan can also be regarded as an automatic correction in the exchange rate market, following China's exchange rate reform in August 2015, and the inclusion of the yuan into the IMF's Special Drawing Rights currency basket” (http://bit.ly/2elKMkS). This will be an indicator of future market trends, since “these moves are anchored to market demand”(http://bit.ly/2elKMkS).  

With the United States presidential election less than two weeks away, discussion of U.S.-Chinese economic relations will be a popular and much-discussed topic. It will be important to continually follow this story, as global economic trends affect every one of us.