I. Bouquets / C. Morales
China surprised markets yesterday by devaluing the yuan, a move that serves the dual purpose of propping up exporters, and thus stimulate the economy and boost the role From the market. But this increases the pressure on its neighbors exporters, which could lead to an escalation of the currency war.
The central bank cut its daily reference rate at 1.9%, which generated the yuan down 1.8%, its biggest intraday drop since China ended the dual exchange rate system in January 1994. The Bank of China argued that the yuan is strong against other currencies “and is moving away from the market expectations “. That will change the price justifies the midpoint of the coin “to meet the market need,” he said. He also assured that this action is “at once”.
Following the announcement, the currencies of South Korea, Australia and Singapore were down at least 1% by betting that other countries in the region seek to weaken their own currencies to keep their exports competitive. Commodities, meanwhile, fell amid speculation that a weak yuan will erode the purchasing power of Chinese consumers.
“This shows how desperate the state government of the economy, “he said Fraser Howie, China analyst and co-author of” Red Capitalism “, Financial Times.
The devaluation came after weekend data showing arise China’s exports fell 8.3% in July, hit by lower demand from Europe, USA and Japan, and producer prices added four years of deflation.
Break in policy
The devaluation reversed the previous policy of propping up the yuan to boost domestic consumption, discourage capital outflows and support the argument that the yuan should have official status reserve currency of the Fund International Monetary.
In the last four quarters the government has diverted US $ 300 billion of the country’s reserves in foreign currency to intervene in the exchange market, which has allowed the yuan is the best performing currency in emerging markets.
One of the biggest risks of devaluation is a massive outflow of capital, which could destabilize the financial system. Tom Orlik, chief Asia economist Intelligence Bloomberg, estimates that a 1% depreciation in the real effective exchange rate (a measure that is adjusted for inflation and trade with other nations) promotes the growth of shipments in one percentage point a delay of three months. At the same time, a drop of 1% against the dollar triggered outflows of US $ 40 billion.
But
said Orlik, the authorities could draw on reserves of the country counter capital flight.
exchange War
Another risk is that an escalating currency war occurs. “The action of China resonate in global currency markets and indicate that one of the last bastions of the major economies could be throwing in the towel and joining the fight by trying to use the policies exchange as a tool to counter weak growth” said Eswar Prasad, a former IMF leader to China, FT.
The Prime Minister Li Keqiang FT had warned in March that China can not “rely on our currency to boost exports “. “We will not see a scenario in which major economies stumble among them to devalue their currencies,” said Li. “That would cause a currency war, and if China feels compelled to devalue the yuan in this process, this would not be good for the international financial system,” he said.
The weak data economic might partly explain the change in the strategy of the Chinese leadership.
The decision also marks a change in the policy of the last decades of the Communist Party at a time of crisis. During the Asian crisis of 1997 China did not move its exchange rate, despite the competitive devaluations in the rest of the region. Neither did during the global financial crisis of 2008. He did now, when the country faces a domestic slowdown.
why some analysts, such as Capital Economics say the change It responds only to a technicality, and is not intended to boost exports. Others are waiting to see whether or not the devaluation is an action “at once”.
Luxury, cars and mining sectors hardest hit among
Foreign companies operating in China, enterprises of raw materials and domestic airlines companies will be hit hardest by the historical devaluation of the yuan.
Shares of European carmakers, manufacturers of class industrial companies plunged after the announcement, since the fall of the currency will reduce the value of its sales in the country in the short term and make the most competitive domestic producers.
LVMH group led landslides among luxury brands with more than 5% decline, followed by the Swiss manufacturer Swatch Group, which fell 5.1%. Kering, owner of Gucci, fell 3.9%.
German Daimler fell 5.2%, BMW and Volkswagen declined 4.3% declined 3.9%.
“The reaction of the shares of luxury cars and is very easy to understand,” he told Bloomberg Anne d’Anselme, money manager Cogefi Gestion. “Those are the sectors that until now have had a very good performance and are exposed to the Chinese slowdown,” he said.
firms accused commodities also hit amid speculation the weakness of the yuan will erode the purchasing power of Chinese consumers. The mining companies traded in Europe gave more than 3%, Glencore papers sinking more than 7%.
in the Chinese market, airlines will be the biggest losers as the devaluation will increase the size of the debt denominated in dollars, according to Lu Wenjie, strategist at UBS.
China Southern Airlines shares tumbled 18.1%, its biggest drop since 2001. China Eastern Airlines yielded 16.4% and Air China fell 12.8%.
In late 2014, 93.3% of China Southern’s debt was in dollars, compared to 97.2% China Eastern and Air China 72.8%, according to its annual reports.
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