Two questions about the devaluation of the yuan – El Financiero

For some it is the renminbi or People’s Money. For others it is the yuan , the kuai or red ticket.

Whatever name you give it, the Chinese currency hit this week global markets after the sudden decision to devalue the central bank.

The decision raised fears of a new currency war to motivated the indignation of Republican presidential candidate Donald Trump.

What it is what happened?
The People’s Bank of China, the central bank, made Tuesday a significant change in the way it manages the yuan to allow markets to play a greater role in the valuation of the currency paper.

For three days, set daily value the yuan against the US dollar on the basis of the closing level of the currency the previous day. Before the change, the PBOC was not guided by the daily market activity, and sometimes wore the currency in the opposite direction.

However, the visible hand of the state was still present. During the period of devaluation, the currency could only be traded 2 percent above or below the set level.

By keeping a tight grip on the currency, the mechanism helped protect China in a time of market turmoil as the Asian financial crisis and the global financial crisis.

So why change? The reason for the change
generates debate among economists.

To the outside at least, it explained the decision in terms of a key reform that allows the market to guide the value of the currency. A central element is the attempt of the IMF accept the yuan in the basket of reserve currencies, which would put it on par with the dollar, euro, yen and British pound, and enhance China’s global stature.

Allow the market to guide the yuan is the kind of move that should please the critics, who accuse China of controlling its currency to help exporters at the expense of other countries. The International Monetary Fund (IMF) welcomed the change, although he said he would wait to see how the new mechanism is implemented.

The yuan has risen sharply since March, since the Chinese authorities aimed at stability in the framework of its goal to the IMF.

Whether or not casual, devaluation It came days after data indicated a sharp drop in exports. A combination of reduction of interest rates and fiscal stimulus to boost growth has not had much success . That’s why the weakening currency is based on the idea that exports receive a boost and could boost the economy.

Another reason is the decline mentioned some of China’s reserves, which have been reduced 315 billion dollars in the year to July, to 3.65 billion, while the central bank maintained the stability of the exchange rate.

Any
What ever the reason, a weaker currency will not solve everything. The drop in exports is due at least in part to weak demand for key markets such as Europe, for example.

The weakness of the yuan will not solve it in overnight.