How China's Stock Market Crash

Influenced Today's Yuan Devaluation

By David Zeiler, Contributing Writer, Money Morning August 11, 2015

The Chinese central bank would never admit it, but China's stock market crash surely
weighed on its decision today to devalue the yuan.
The news had an immediate impact, with the yuan falling nearly 2% against the U.S.
dollar. It marked the biggest one-day plunge since 1994.
Because of the way the yuan is controlled by the People's Bank of China (PBOC), the
devaluation of the yuan wasn't achieved by lowering interest rates the way most
central banks would do it.
You see, the PBOC had confined the yuan's value to a 2% range above or below the U.S.
dollar, called the "daily fixing." Now the PBOC will let the yuan trade a bit more freely,
basing the yuan's value on its close from the previous trading session.
The PBOC said the reason was to make the yuan's value more market-based. That's
something that the International Monetary Fund (IMF) has urged as China seeks to get
the yuan elevated to the status of a world reserve currency.
But the timing of the move suggests that China's stock market crash also has played a
role. A combination of weakness in the Chinese economy and risky investing practices,
particularly margin trading, lopped as much as 32% from the Shanghai Composite Index
from June to July, and it's still down 24% from the high.
Concerns about the health of the Chinese economy and the markets rose when the
government reported over the weekend that the nation's July exports plunged 8.3%
from the previous year. The Chinese government also reported that inflation rose only
1.6% in July about half of the government target of 3%.
The lousy economic data drove the PBOC to reverse its resistance to loosening its grip
on the yuan, something the IMF, other central banks, and the U.S government have
urged for years.
The Yuan Devaluation a Tool to Stem China's Stock Market Crash
"I've long warned that Washington should be careful what it wished for," said Money
Morning Chef Investment Strategist Keith Fitz-Gerald. "This is HUGE because it means
China's entered the currency wars in the biggest devaluation of the last 20 years. It's a
move intended to shore up exporters."
Exports are a big part of the Chinese economy. So the PBOC is just following the lead of
other central banks (including the U.S. Federal Reserve) in devaluing its currency in a
bid to stimulate its economy.
Indeed, the Chinese government has tried just about everything to prop up its sagging
stock market, from pumping money into the market to freezing trading on as many as
half of Chinese companies.
Despite the frantic efforts of the Chinese government, the Shanghai index is still down
24% from its June 12 high. So now the PBOC is trying a devaluation of the yuan.
But other nations might not sit still for a cheaper yuan, as it puts them at a trade
disadvantage. If ongoing woes in the Chinese economy drive the PBOC to take further
action to devalue the yuan, it will only accelerate the currency wars.

"It's hard to believe this will be a one-off adjustment," Stephen Roach, a senior fellow at
Yale University and former non-executive chairman for Morgan Stanley in Asia, told
Bloomberg. "In a weak global economy, it will take a lot more than a 1.9% devaluation
to jump-start sagging Chinese exports. That raises 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."
China Targets the Gold Market: The Chinese government has a multi-pronged
strategy to strengthen the Asian giant's economy. After years of playing second
fiddle in the gold market to the Western economic powers in Europe and the
United States, China is making moves toward a more influential role. Here's
how China plans to dominate the world gold market