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Yuan Devaluation: Marc Faber and Economists’ Take
Aspire | 31 August 2015
By: Lim Si Jie
Articles (169) Profile

China rattled global markets last week by devaluing its currency – the yuan. It adjusted the value of its currency downward compared to other currencies. Its currency’s value against the dollar was cut by 1.9 per cent. This is the yuan’s biggest one-day drop since 1994.

Why Did People’s Bank of China Devalue the yuan?

The yuan has been rising in value, when it should have been falling due to slowing economic growth and lower exports. The yuan has risen by 11 per cent against the euro since January 2015. On top of that, the currencies of other developing countries have fallen. This has hurt Chinese exporters as the rising yuan makes Chinese exports more expensive abroad. In fact, Chinese exports are already falling, plunging by 8.3 percent in July.

Signs of a Weakening Chinese Economy

Commodity markets, including that of industrial commodities have collapsed over the last two to three years. In addition, China released a raft of disappointing economic data for July, with industrial output growing at an annualized 6.0 percent for the month, well below expectations of 6.6 percent from a Reuters poll and down from 6.8 percent in June.

Credit Suisse economists believe that the 8 percent decline in Chinese exports in July likely served as the immediate catalyst for intervention. Combined with rising labour costs, the rising value of the yuan has made China’s exports increasingly uncompetitive.

Paul Krugman: China Switching Back to a Familiar Strategy

China has been trying to engineer a shift from export-led growth to an expansion based on consumer spending while simultaneously trying to deflate a property bubble. People’s Bank of China’s (PBOC) latest move to loosen the yuan’s link to the value of the dollar, suggests that policymakers may be losing patience with that strategy, and are instead reaching for the familiar strategy of making a cheap currency.

Nobel prize-winning economist Paul Krugman described PBOC’s decision as “the first bite of the cherry,” suggesting more devaluation could follow despite PBOC reaffirming that there would be no further depreciation.

Dr Gloom: Devaluation Meaningless

While Global markets have convulsed since China devalued its currency lower, “Dr Gloom” Marc Faber opines that the step is “completely meaningless,” given its relatively small move. He finds the 2 or 3 percent devaluation of the yuan (against the U.S. dollar) completely meaningless because the Chinese yuan has appreciated by 80 percent over the past two years against the yen.

Dr Gloom: Yuan Likely To See More Decline

While the market was more focused on PBOC devaluing its currency, PBOC also made a change to the mechanism behind its currency pricing to reflect more market forces. Under the new pricing mechanism, the Chinese yuan will go down should the market forces be against it. Marc Faber signals that the Chinese yuan could face more decline in the coming months under this new mechanism.

One major factor that may drive bigger declines in the yuan is that the currency is also reflecting weakness in the Chinese economy. Marc Faber believes that the Chinese economy is much weaker than the consensus believes. Marc Faber maintains his previous forecast that China will not see any growth above four percent. He believes that the Chinese economy is currently growing at a maximum of two percent.

Impact Of Yuan Devaluation Globally and Locally

On a global level, Jeremy Cook, chief economist at World First U.K, said that the Federal Reserve might delay increasing interest rates as a result of China’s devaluation of the yuan.

On a local level, UOB Economists are predicting that Singapore’s already vulnerable economic growth will take a hit if current volatility in the foreign exchange and stock markets persists for a longer period. Prolonged uncertainties will affect business and consumer confidence, which will slow down consumption and economic activities. If these happen, the broader economy may be further hurt during a time when global outlook remains sluggish. UOB singled out the semiconductor sector, which largely exports to China, as a vulnerable industry as the yuan depreciates against the Singapore dollar.

Si Jie is no stranger to investing having started his journey at a young age. He is heavily influenced by acclaimed investors such as Benjamin Graham, Peter Lynch, and John Rothchild.

Please click here for more information about this author.

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