Investment Clock insights

Has China started a devaluation strategy?


Trevor Greetham

11 August 2015

The People's Bank of China has devalued the renminbi (RMB) rate by 1.9%, which doesn’t sound like much but it’s the largest one day move in China’s closely managed currency since a similarly sized upward revaluation in 2005 and a massive devaluation in 1994*. I see this as a continuation of the weak Asian currency trend rather than a game changer for Chinese growth.

The shock 50% devaluation in 1994 was one of the contributory factors to the deflationary Asia crisis later that decade. Today’s change is tiny in comparison but the central bank will give the market a greater role in setting daily exchange movements and that could mean a more prolonged trend of Asian currency weakness as China’s close trading partners adjust their exchange rates downwards.

Along with strong money supply data out today, a weaker RMB adds to the chances of a modest pick up in China’s slowing economy. However, China’s strong desire to rebalance its economy away from exports towards the domestic consumer, argues against a dramatic devaluation and China’s economy faces serious headwinds.

I prefer to see this as a defensive shift in policy as China prepares for higher US interest rates and an even stronger dollar. Central bank policy divergence between the US Federal Reserve (Fed) on the one hand and the European Central Bank and Bank of Japan on the other, has made China’s upwardly crawling peg versus the US dollar increasingly inappropriate. China exports to, and competes with, the whole world and its currency is up by a crippling 60% against the Japanese yen and a near 20% versus the euro over the last three years.

With speculation mounting over a possible September Fed rate hike and domestic data coming in weak, China needed to de-peg and urgently so.

RNB v USD

*Source: Bloomberg 10.08.2015. The value of your investment and the income from it is not guaranteed and can fall as well as rise. This article is for professional customers only. The views expressed are the author’s own and do not constitute investment advice.