Here's why China devalued its currency

[jhungary]

Not quite what I was alluding to. As per a few people on this forum, the Yuan is going to kill the USD as a global reserve, but when push-comes-to-shove and instability creeps across the lands, people flock to the USD as a safe investment and increase their holdings of USD and US Treasuries, thus helping the USD's status as a reserve currency, not hindering it.

The USD's impact on US businesses is a different, but no less important discussion.

Actually, the USD is a special case in this. Simply because it is the world reserve.

When we use USD to trade with a foreign nation. Say we use 100 USD to buy a Hard Disk Drive from Thailand, Thailand will need to come up with a hard disk drive that worth $100 but on the other hand, the US Customer only have to come up with a bill of USD that worth $100, in effect, the federal bank basically profit on printing the money (Which cost less than 5c to print a $100 bill)

The problem is not that clear when we are talking about small trade, but when we are talking about larger trade that cannot be settle with paper money (like 1 billions dollars) what can we hold onto that 1 billions face value on? Basically nothing.

Money worth their face value only because we trust the bank or whoever issue that money they can exchange $100 for that piece of paper, but when the whole world are using 63% of USD in fiat currency, US bank simply cannot return the true value of $100, since they can't vouch for that amount, then the value will go into the black, and start borrowing to make the vouch.

What all this relates to what you say you might ask?

There are no currency can take the place of USD as global reserve, if that happens, the US financial system will collapse and hence the world finance system will go with it. The day the USD being replace as global currency is the day the world finance dies. But on the other hand, exceptional demand worldwide means the USD cannot be exist in the current form, which basically depending on borrowing money from other country by issuing bond to sustain it needs. The only way is to migrate to a third party fiat currency that everyone, including the USD can exchange to, something like a IMF voucher of sort, but for that to happens, we need a true world wide financial body.

Until then, the more the other basket currency share the burden will actually do a lot more good to USD.

 

[zeronet]

Most of you guys are talking beside the point. In fact, it's a clever plan by the Chinese gov. to de-dollarise its currency and economy.

Let me put my two cents into this.

Here are the following facts:

China has tons of USD
Gold price is tied to the rate of USD
USD goes up, gold goes down
The lower the gold prices goes, the cheaper China buys gold

Now, with the devaluation, the psychological part comes in. Everyone who has little clue about the relationship about gold and the USD will think that the USD is a safe haven and so they flock to the USD pushing the USD up and the gold price down.

It's a catch 22 for the US and a clever move by China.

doesn't make much sense because what you can get on market is most likely only paper gold, meaning no real gold out there to match it. the real reason of devaluation is quite straightforward as many articles presented, it is only a tactic move to please IMF, dear sir, look, the fluctuation range is much relaxed and it is following the market trend. sorry to the us congressmen, it is opposite to your desired direction. to benefit the export? look at the immediate devaluation of other peer currencies in asia, it did nothing to help china's export.

 

[NiceGuy]

Until then, the more the other basket currency share the burden will actually do a lot more good to USD.

Not good for USD, for USA coz u soon will see CN commodities floor US's market.

Only TPP which should come out in abt 3 years can save USA against CN in currency war now

 

[Götterdämmerung]

doesn't make much sense because what you can get on market is most likely only paper gold, meaning no real gold out there to match it. the real reason of devaluation is quite straightforward as many articles presented, it is only a tactic move to please IMF, dear sir, look, the fluctuation range is much relaxed and it is following the market trend. sorry to the us congressmen, it is opposite to your desired direction. to benefit the export? look at the immediate devaluation of other peer currencies in asia, it did nothing to help china's export.

For the time being, the inclusion of the yuan into the SDR has been postponed. Hence it's China's sweet revenge on the IMF and the US since this devaluation renders the US unable to raise interest rate.

Secondly, with a stronger USD, China with her mountain of greenbacks can continue her buying spree all over the world and the seller is more than happy to accept the greenback as it has risen in value. China gets the companies, mines, infrastructure, know-how etc. and the sellers get lots of greenbacks.

Of course, China won't be stupid enough to buy paper gold. China only wants physical gold even if there is barely any on the market. China is pushing it … hard. We'll see how long the US can manipulate the market with its paper gold.

 

[Fenrir]

For the time being, the inclusion of the yuan into the SDR has been postponed. Hence it's China's sweet revenge on the IMF and the US since this devaluation renders the US unable to raise interest rate.

Not necessarily. The Fed's key metric is a strengthening US economy, not China:

But as it considers whether to lift rates as soon as next month, the Fed's key focus is the growing durability of the U.S. labor market. Fed policymakers could even see China's devaluation as boosting global growth if it helps shore up a stumbling Chinese economy that has hit world commodity prices and financial markets.

...

"It adds a little more drag to the economy via net exports and puts a slight damper on consumer prices, but not enough to alter the course of the U.S. economy or labor market significantly."

...

Atlanta Fed President Dennis Lockhart and other policymakers say that between now and then, data on U.S. jobs growth, inflation, and retail sales will inform that decision, suggesting only a big shock from abroad could throw things off.

...

"The Fed is likely to think that today's move reduces the risks to the U.S. economy, just like any other foreign easing move does."

Eyes on U.S. economy, Fed likely unmoved by China devaluation| Reuters

If the US economy and labor market continue to improve, and according recent data It is:

American Economy News & Updates | Page 11

And China's devaluation helps improve stability in East Asia, then the Fed will remain on track. Ironically, the Fed sees China's devaluation as reducing US risk exposure as a slowdown in China would harm the global economy, which includes the US.

 

[Götterdämmerung]

Not necessarily. The Fed's key metric is a strengthening US economy, not China:

But as it considers whether to lift rates as soon as next month, the Fed's key focus is the growing durability of the U.S. labor market. Fed policymakers could even see China's devaluation as boosting global growth if it helps shore up a stumbling Chinese economy that has hit world commodity prices and financial markets.

...

"It adds a little more drag to the economy via net exports and puts a slight damper on consumer prices, but not enough to alter the course of the U.S. economy or labor market significantly."

...

Atlanta Fed President Dennis Lockhart and other policymakers say that between now and then, data on U.S. jobs growth, inflation, and retail sales will inform that decision, suggesting only a big shock from abroad could throw things off.

...

"The Fed is likely to think that today's move reduces the risks to the U.S. economy, just like any other foreign easing move does."

Eyes on U.S. economy, Fed likely unmoved by China devaluation| Reuters

If the US economy and labor market continue to improve, and according recent data It is:

American Economy News & Updates | Page 11

And China's devaluation helps improve stability in East Asia, then the Fed will remain on track. Ironically, the Fed sees China's devaluation as reducing US risk exposure as a slowdown in China would harm the global economy, which includes the US.

You can believe what you want.

 

[TheTruth]

So, you are saying the government does not build road, school, hospital, docks, and military equipment on their GDP, and answer me this, what is the BIGGEST PIE ON Chinese GDP?

Well, the PIE of the GDP is only of the Net Exports, not ofing the Exports, so the BIGGEST PIE ON Chinese GDP is INVESTMENT

Did you learn English from Polandball?

Duh, it was overvalued a long time ago, just because it was UP (Not this point anyway) does not mean they are not overvalued. The fact is CHINESE GOVERNMENT deflate the currency show you the Yuan is overvalued. And from how much the stock market crashed you can deduced the true value of stock, hence deduced the true value of currency

Well, I learn a lot in school, thanks for asking.

Stocks and currency values are not static. The CCP has its own motives for adjusting the value of its currency. I guess you didn't have your hands down your pants when Japan and India's currencies went down, now did you?

 

[jhungary]

Well, the PIE of the GDP is only of the Net Exports, not ofing the Exports, so the BIGGEST PIE ON Chinese GDP is INVESTMENT

Did you learn English from Polandball?

Stocks and currency values are not static. The CCP has its own motives for adjusting the value of its currency. I guess you didn't have your hands down your pants when Japan and India's currencies went down, now did you?

first of all, if you are to attack someone else's English, you need to up your own game,

I simply cannot understand what do you mean by "Is only of the Net Exports, not ofing (Ofing is not even a word) the exports"

And second thing is, YOU ARE WRONG, the majority of GDP does not come in with investment, while Tertiary sector are the biggest of the GDP pies, the problem is, tertiary industry does not only make up of Investment, heck, even financial services does not solely make up of investment. Financial Services in Financial Heavyweight country usually only consist less than 1/5 of total GDP, even if we assume China is on par with those country (such as US, UK, and Germany) the Chinese Investment can have share of 15-20% of GDP, it is still WAY BELOW the secondary sector, which only consists of Industry.

In reality, Financial sector contribute no more than 10% of Chinese GDP, and investment have a even smaller pie.

And While stock value is floating, the currency value is adjusted by the bank to have maximum gain on investment and export, however, the adjustment is not on the same direction. You need a stronger Yuan to maximum export profits (Higher exchange rate earn more foreign cash) and a lower yuan to maximum investment portfolio (lower exchange rate mean you can invest more with your foreign cash) and in the governmental standard, they are mutually exclusive. You cannot swing both way to maximum gain by both sector. That is the reason why currency is calculated on a floating rate in the first place.

The reason why Chinese lower the value now can only be explained by bad forecast up ahead, and that is done by over-estimated currency value for being an export driven economy, since the only other reason why one country would want to lower their currency value is debt, and last I check China did not have any foreign or national debt.

Bringing in Japan and India does not literate your point, as those two are not related to Chinese's own predicament. You are just deflecting my point and talk about something else altogether.

 

[hans]

I would say it is the problem with old political system and new life style..
China is suffering from that too.
Anyway CCP is studying very fast to adjust to the rapid developing economy and increasing demand of freedom..
Still it looks awkward..
For VCP it will be more difficult as it lack the huge resource CCP has.

Yes, that's true because with rising standard of living people (workers) would demand for more and that's fine. I don't think there is anything wrong with that. Only main issue with Vietnam right now is its policies, corruption, human rights and freedom, freedom of speech, etc are still lacking. A lot of people are willing to put money into Vietnam to develop it, but the politic sucks now.

3D printer is not rocket science. It works exactly like a CNC machine.

 

[FairAndUnbiased]

first of all, if you are to attack someone else's English, you need to up your own game,

I simply cannot understand what do you mean by "Is only of the Net Exports, not ofing (Ofing is not even a word) the exports"

And second thing is, YOU ARE WRONG, the majority of GDP does not come in with investment, while Tertiary sector are the biggest of the GDP pies, the problem is, tertiary industry does not only make up of Investment, heck, even financial services does not solely make up of investment. Financial Services in Financial Heavyweight country usually only consist less than 1/5 of total GDP, even if we assume China is on par with those country (such as US, UK, and Germany) the Chinese Investment can have share of 15-20% of GDP, it is still WAY BELOW the secondary sector, which only consists of Industry.

In reality, Financial sector contribute no more than 10% of Chinese GDP, and investment have a even smaller pie.

And While stock value is floating, the currency value is adjusted by the bank to have maximum gain on investment and export, however, the adjustment is not on the same direction. You need a stronger Yuan to maximum export profits (Higher exchange rate earn more foreign cash) and a lower yuan to maximum investment portfolio (lower exchange rate mean you can invest more with your foreign cash) and in the governmental standard, they are mutually exclusive. You cannot swing both way to maximum gain by both sector. That is the reason why currency is calculated on a floating rate in the first place.

The reason why Chinese lower the value now can only be explained by bad forecast up ahead, and that is done by over-estimated currency value for being an export driven economy, since the only other reason why one country would want to lower their currency value is debt, and last I check China did not have any foreign or national debt.

Bringing in Japan and India does not literate your point, as those two are not related to Chinese's own predicament. You are just deflecting my point and talk about something else altogether.

lolwut. You have a clear problem with understanding what is going on here.

Economists divide GDP into consumption, investment, government spending and net exports. There is literally no other way to spend money. Nobody is talking about financial sector here, as not all investment is directly from the financial sector. This has nothing to do with financial services or the tertiary sector, as those refer to the source of GDP, not classification of GDP. Secondary sector can be either consumption (toys, computers) or investments (capital goods, infrastructure), for instance.

The Expenditure Categories of Gross Domestic Product

Net exports contributed small or negative growth since 2009.

http://www.economist.com/blogs/freeexchange/2012/10/rebalancing-china

 

[TaiShang]

What the Latest Currency 'War' is All About

Pepe Escobar

When the US embarks on perennial quantitative easing, that's OK. When the EU does QE as well, that's OK. But when the Bank of China decides it's in the best interest of the nation to let the yuan go down a bit instead of infinitely up, that's Armageddon.

It took the Bank of China to devaluate the yuan on two consecutive days — moving within the 2 percent band that it's allowed to — for the proverbial global financial banshees to go completely bonkers.

Forget the hysteria. The heart of the matter is that Beijing has stepped on the gas in a quite complex long game; to liberalize the yuan exchange rate; allow it to free float against the US dollar; and establish the yuan as a global reserve currency.

So this is essentially exchange rate policy liberalization — not a currency "war", as the frenetic spin goes from Washington/Wall Street to Tokyo via London and Brussels.

Let's check some expert reaction

Former Morgan Stanley non-executive chairman in Asia, Stephen Roach, delivers the predictable Goddess of the Market orthodoxy, warning about the "distinct possibility of a new and increasingly destabilizing skirmish in the ever-widening global currency war. The race to the bottom just became a good deal more treacherous."

A note written by a group of HSBC analysts is more realistic; "The depreciation pressure on Asian currencies from China's action should fade as the nation isn't aiming at engineering a much weaker yuan. Doing so would contradict the goal of promoting greater global use of the yuan."

But it's Chantavarn Sucharitakul, the Bank of Thailand's assistant governor, who hits the nail on the head Asia-wide; "The long-term impact must be assessed as to whether greater flexibility of the yuan could benefit China's economic reform, while the depreciating yuan could be positive for China's economic growth, which would benefit regional trade as well."

The Bank of China itself, in a statement, stresses it will allow the markets to have more influence over the yuan exchange rate.

And crucially, it also stresses there is no economic basis for the devaluation, pointing to China's enormous current account surplus and humongous foreign exchange reserves.

As Beijing interprets it, keeping a strong link to the US dollar has interfered with China's being competitive with its top trading partners — Japan and Europe.

So now it's time to rock the (wobbly) boat. Thus the "currency war" hysteria — because the practical result, in the medium term, will be a new boost to Chinese exports.

When the US embarks on perennial quantitative easing (QE), that's OK. When the EU does QE as well, that's OK. But when the Bank of China decides it's in the best interest of the nation to let the yuan go down a bit instead of infinitely up, that's Armageddon.

Just do the math

Having the yuan track close to the US dollar served China very well — until now. QEs in the EU and Japan led to a weaker euro and a weaker yen — while the yuan remained stable against the US dollar.

Translation; since over a year ago, in June 2014, the yuan's real exchange rate has been the world's strongest, increasing by 13.5 percent. That was more than that of the US dollar (12.8 percent).

It was not hard for Beijing to do the math; the strong link with the US dollar was eroding China's competitiveness with top trading partners Japan and Europe.

Yet a simple 2 per cent devaluation may not be enough to boost China's exports. After all the yuan appreciated more than 10 percent over the past year relative to China's top trading partners.

Thus the inside word in Beijing about "powerful voices inside the government" pushing for the Bank of China towards an overall 10 per cent devaluation of the yuan. Now that would certainly boost exports.

So the devaluation this week — which has generated so much hysteria — seems to point towards a few more devaluations further on down the road.

This being China, where planning ahead is a matter of years, not a day-to-day frenzy as in Goddess of the Market territory, the whole game is about turning the yuan into an official global reserve currency.

A team of IMF experts has recently been to Shanghai, talking to officials at the Chinese central bank and China Foreign Exchange Trading System, which oversees currency trading in China, to establish whether the yuan can be part of the special drawing rights (SDR) basket.

Not surprisingly, the IMF itself praised the recent devaluation; "China can, and should, aim to achieve an effectively floating exchange rate system within two to three years."

And the IMF also admits that, "a more market-determined exchange rate would facilitate SDR operations in case the Renminbi were included in the currency basket going forward."

So this is what it's all about; Chinese adjustments with an eye to get the yuan ready to qualify for reserve currency status. The IMF's final decision is expected to be made by the end of 2015 or by the fall of 2016.

An internationalized yuan established as a global reserve currency implies a "market-determined" exchange rate policy. That's what the Bank of China is ultimately aiming at. The rest is a tempest in a (US dollar) teacup.

 

[jhungary]

lolwut. You have a clear problem with understanding what is going on here.

Economists divide GDP into consumption, investment, government spending and net exports. There is literally no other way to spend money. Nobody is talking about financial sector here, as not all investment is directly from the financial sector. This has nothing to do with financial services or the tertiary sector, as those refer to the source of GDP, not classification of GDP. Secondary sector can be either consumption (toys, computers) or investments (capital goods, infrastructure), for instance.

The Expenditure Categories of Gross Domestic Product

Net exports contributed small or negative growth since 2009.

http://www.economist.com/blogs/freeexchange/2012/10/rebalancing-china

Dude, that is not the composition of "Make Up" of GDP

If you care to look at the heading of the article you quote.

That's the Expenditure Categories of Gross Domestic Product

While I am talking about and asking about the composition of GDP.

You can either measure the actual production over a period of time to get the true GDP value or by measuring how much the government spend on expenditure to calculate value. In layman term, you can work out how much a country earn by either measuring how much that country earn during a period of time, or how much the country spend over the same period of time.

from the same reference to your article

Calculating Gross Domestic Product

Just because you can work your way back to work out your GDP by knowing how much you spend on different category, IT DOES NOT TELL YOU HOW MUCH THE INCOME IS FROM EACH CATEGORY. Simply because how much you spend on each different category does not represent how much they earn in the same category.

In short, how much you spend does not have any relation to how much that category contribute to your GDP. While I am talking about actual production, you are talking about actual expense. You are the one who's mistaken...

 

[FairAndUnbiased]

Dude, that is not the composition of "Make Up" of GDP

If you care to look at the heading of the article you quote.

That's the Expenditure Categories of Gross Domestic Product

While I am talking about and asking about the composition of GDP.

You can either measure the actual production over a period of time to get the true GDP value or by measuring how much the government spend on expenditure to calculate value. In layman term, you can work out how much a country earn by either measuring how much that country earn during a period of time, or how much the country spend over the same period of time.

from the same reference to your article

Calculating Gross Domestic Product

Just because you can work your way back to work out your GDP by knowing how much you spend on different category, IT DOES NOT TELL YOU HOW MUCH THE INCOME IS FROM EACH CATEGORY. Simply because how much you spend on each different category does not represent how much they earn in the same category.

In short, how much you spend does not have any relation to how much that category contribute to your GDP. While I am talking about actual production, you are talking about actual expense. You are the one who's mistaken...

You mistaked "investment" in C+I+G+netExp for "investment" as in financial services. You clearly do not understand that "exports" and "investment" together means something, while "exports" and "tertiary sector" together means nothing, since exports can be from primary, secondary or tertiary sectors.

The original post was about "investment" vs. "net exports". That's all. Its OK to admit you're wrong lol. Not everyone knows everything about every topic.

 

[jhungary]

You mistaked "investment" in C+I+G+netExp for "investment" as in financial services. You clearly do not understand that "exports" and "investment" together means something, while "exports" and "tertiary sector" together means nothing, since exports can be from primary, secondary or tertiary sectors.

The original post was about "investment" vs. "net exports". That's all. Its OK to admit you're wrong lol. Not everyone knows everything about every topic.

DO you even know there are more than two way to calculate GDP. One by measuring the productivities, one by measuring the expenditure.

Basically one is by actually calculate the output of production (GDP = Primary Sector + Secondary Sector + Tertiary Sector) the other one works on how much the government spend the GDP on (GDP = .C + I + G + NX)

there are another approach called income approach, but then I don't want to further complicate this.

Quote
Calculating Gross Domestic Product

Gross domestic product (GDP) measures an economy's production over a specified period of time. More specifically, gross domestic product is the "market value of all final goods and services produced within a country in a given period of time." There are a few common ways to calculate the gross domestic product for an economy, including the following:

• The Output (or Production) Approach: Add up the quantities of all final goods and services produced in an economy within a given time period and weight them by the market prices of each of the goods or services.

• The Expenditure Approach: Add up the money spent on consumption, investment, government spending, and net exports in an economy within a given time period.

Let's go back to what you said

Economists divide GDP into consumption, investment, government spending and net exports. There is literally no other way to spend money. Nobody is talking about financial sector here, as not all investment is directly from the financial sector. This has nothing to do with financial services or the tertiary sector, as those refer to the source of GDP, not classification of GDP. Secondary sector can be either consumption (toys, computers) or investments (capital goods, infrastructure), for instance.

What you are talking about is the "EXPEDITURE" of Chinese spending, there are no Primary, Secondary and Tertiary if you calculate GDP via Expenditure approach, as you are talking about working on one country GDP by working out how much the government and community spend, instead of how much the country earn by production.

in this case, investment can be a whole range of thing, range from investing in domestic housing, investing in factory to make goods. In short, what you are saying is what SPEND more with the Chinese GDP

However, what I ask is, and do read carefully this time, what EARN more, say you have 20 dollars on a GDP, you spend 5 dollars on domestic consumption (C), 10 dollars on investment (I), 4 dollars on government purchase (G) and 6 dollars on Net Export (NE) but does that answer my question on what earn more from? No, you just give me an answer of where your GDP is being spend on.

And no, the original post is not about investment vs net export. I ask your fellow member, where is the majority of Chinese GDP coming from, your answer is where is the majority of Chinese GDP going to.

 

[TaiShang]

RMB value gap basically covered, currency still strong: PBOC
2015-8-13 13:10:30


Adjustment to close the gap between the central parity rate and the actual trading rate of China's currency, the renminbi (RMB) or yuan, is basically complete, an official of the People's Bank of China (PBOC) said Thursday at a press conference.

The value of the yuan has gradually returned to market levels after declines during previous days, and the yuan will remain strong in the long run with no basis for persistent and substantial depreciation, said Zhang Xiaohui, assistant governor of the PBOC.

Zhang said that previously there was a 3-percent gap in the yuan's value between the rate and market expectations.

The central parity rate of the yuan weakened by 704 basis points, or 1.1 percent, to 6.401 against the US dollar on Thursday, narrowing from Wednesday's 1.6 percent and almost 1.9 percent on Tuesday.

On Tuesday, the People's Bank of China reformed the exchange rate formation mechanism to better reflect market development in the exchange rate of the yuan against the US dollar.

***

China's RMB devaluation will aid the world economy
By John Ross
August 13, 2015

China's RMB devaluation is good news not only for China but also for the world economy. China is the main engine of global growth, therefore any weakness in its economy has negative consequences for everyone.

The main feature of the global economy since the international financial crisis began in 2008 has been a further deceleration in the already slow growth of the developed economies. Figure 1 shows their annual average GDP growth since 2007 has been less than 1 percent a year, compared to an average 5.5 percent for developing economies led by China. From 2007-2014 China accounted for 34 percent of world growth compared to 14 percent for the U.S., 4 percent for the EU, and 1 percent for Japan.

Figure 1

None of the major advanced economies, due to general ideological opposition to State intervention in the economy, has been prepared to address the underlying problem causing slow growth - low fixed investment levels. Consequently despite pressure for State infrastructure investment from leading economic figures such as former U.S. Treasury Secretary Larry Summers and Martin Wolf, chief economics commentator of the Financial Times, the advanced economies remain trapped in low growth by their dogma of "private good, State bad." Instead, they attempted to find a way out by other policies they believed were in their own interests - but which simultaneously damaged other economies and failed to overcome the underlying problem.

Japan's quantitative easing (QE) under "Abenomics" created severe yen devaluation. Figure 2 shows the yen devalued against the dollar by 30 percent after Abe became prime minister in September 2012.

The Eurozone, faced with economic stagnation and Greece's financial crisis, launched QE leading to a Euro devaluation of 26 percent since the beginning of 2014.

Japan and the Eurozone therefore both pursued policies attempting to make their exports more price competitive and imports sharply less competitive - negative policies for other countries.

Figure 2

The U.S. did not pursue currency devaluation - the dollar rose sharply as the yen and Euro fell. But the U.S. is increasingly concerned by a domestic asset bubble economy after years of QE and virtually zero interest rates. To try to choke these off the Federal Reserve officially indicated it would like to raise interest rates this year - despite low inflation, low wage increases and relatively slow U.S. growth.

However, as most other economies currently have low interest rates to stimulate growth, the consequences of a U.S. interest rate rise are clear - it would suck capital out of the rest of the world. Christine Lagarde, managing director of the IMF, publicly appealed for the Federal Reserve not to act this year, only to be told the Federal Reserve would be guided by U.S. domestic needs not global ones.

The advanced economies therefore remained locked in slow growth but each running internationally destabilizing policies - Japan and the EU pursuing "currency wars" and the U.S. offering the threat of a globally destabilizing interest rate rises.

The best way out of this situation would be coordinated international action. China proposed this at the G20 and in the July speech by Premier Li Keqiang to the OECD. One of China's most well connected economists, former World Bank Vice President Justin Yifu Lin, has promoted an integrated global economic recovery plan based on China, and other capital-rich economies, financing large scale infrastructure investment in developing countries - simultaneously stimulating their growth and export markets for the sophisticated capital equipment primarily produced by developed economies. China has taken a regional initiative by creating the Asian Infrastructure Investment Bank, but the advanced economies have refused coordinated action globally.

Without this, the next best solution is for China to act by itself. Although China's 7.0 percent GDP growth in the year is far above the others, nevertheless signs of economic slowdown have appeared. By July China's industrial growth fell to 6.0 percent from 9.0 percent a year earlier.

This impacts not just China but the global economy, particularly by lowering Chinese imports. By July 2015 China's exports were down 3 percent compared to the year before but its imports had fallen 11 percent - as Figure 3 shows.

Figure 3

With China experiencing difficulties, the result was a dramatic fall in world commodity prices. This has extremely negative consequences for developing economies, most of which rely on commodity exports. By August 11, the day before RMB devaluation, the Bloomberg world commodity price index had fallen 27 percent compared to a year previously and by 51 percent compared to its post-international financial crisis peak.

Due to their stance against State investment, the advanced economies cannot lead a recovery of the world economy. However, China has been stimulating its economy with interest rate cuts, bank reserve requirement ratio reductions, and targeted infrastructure investment. Yet, even it could not overcome the overall 16 percent Euro devaluation, and 36 percent yen devaluation. Therefore China has now supplemented its domestic stimulus programme with a modest RMB devaluation.

For China itself evidently the consequences of measures to maintain steady growth are beneficial. But for the reasons outlined China's position as the main engine of world growth means they are also positive for the world economy.

***
An IMF spokesperson says that the adjustment appears to be "a welcome step" because the change should let market forces play a greater role in determining the exchange rate.


IMF: Yuan's downward adjustment 'a welcome step'
ENGLISH.CNTV.CN|BY ZHANG JINGYA