The two theories as to why China devalued the yuan – FORTUNE

HONG KONG – Why Beijing decided to depreciate the yuan?

That question has plagued economists and investors in recent days, triggering a frantic search for clues or indications on poor communications issued by the People’s Bank of China.

So, two theories have emerged: It was, some say, a historic reform that will allow market forces have more influence on the Chinese currency; others say it was a measure of internal stimulus that opens the door to a currency war in Asia.

Beijing insists his motives are pure and noble.

The central bank said its decision to change the way in which the yuan is set each day (an estimate made before the bank itself in an opaque process and now uses the closing price previous day) it is a market-oriented reform. It is something that the international community has been asking for time.

The reform “will continue with a focus on the market,” the bank said Tuesday. Market forces now “play a more important role” in determining exchange rates, he added.

The International Monetary Fund (IMF), which has been considering the possibility of including the yuan in the basket of currencies considered elite, praised the decision. In a statement which drew largely explaining Beijing, the IMF said the decision “will allow market forces to play a more important role.”

But analysts see another reason behind: China’s economy is in trouble, and a weaker yuan would make the country’s exports in the eyes of international buyers more attractive. The devaluation of the currency would be a quick way to revitalize the country’s factories.

The latest export data from China were terrible, and those bad results “clearly pushed the central bank to use one of your most powerful tools to revive the Chinese economy: the exchange rate,” they wrote Natixis economists.

If this was the true motivation of the Central Bank and the “market forces” was just a pretext, China risks revanchist trigger a series of responses from its neighbors in the region, a phenomenon usually they called ‘currency war.’

“In today’s world, where almost all aspire to export-led growth, a deliberate attempt to devalue the currency is indeed a currency war,” they wrote analysts Oxford Economics. “China is not the only one who does … but to implement an administrative depreciation, China risks enable broader currency wars that have so far been avoided.”

On Thursday, after the yuan fell more than 3% in just three trading days, the Chinese central bank officials convened a rare news conference and tried to explain their reasoning.

Officials held his ground, saying that motivated the desire to implement market-oriented reforms, and argued that the circumstances do not warrant the continued depreciation. Investors responded favorably, so the yuan appreciated.

The Bank also addressed his critics, while acknowledging that anticipated the devaluation of the yuan, he warned that a drop of 3% was sufficient to bring the currency to a reasonable level and that extraordinary depreciation “had almost over. “

” The press conference today’s Bank of China supports our view that the fall of the yuan as a result of the transition to a new exchange rate mechanism was an isolated incident and not an attempt to design a large-scale depreciation for competitive purposes, “noted analysts at Capital Economics.