Not because China wants to start one, but because the decision is not China’s. Ostensibly, the changes implemented over the past three days aim to give market forces greater influence over the currency. That is good news. But by announcing, on three consecutive days, a devaluation of the currency – each time coupled with assurances that it was a one-off – the authorities have sharply undermined their credibility. Our modelling suggests a 10 per cent Chinese devaluation with no response from others would benefit China, but lower world GDP growth by 0.25 per cent in 2016 as other countries lost out. It would also export Chinese deflation to the rest of the world. In a world where many countries already try to achieve export-led growth, the mere suspicion of Chinese competitive devaluations can be enough to trigger pre-emptive moves by competitors, leading to a vicious circle. So far, there have been few counter-moves. But unless China stops now, that won’t last.
Chang Liu is China economist at Capital Economics, says No
The renminbi’s (RMB) recent weakness was caused by the People’s Bank of China (PBOC) adopting a new mechanism for setting the reference exchange rate between the Chinese currency and the US dollar. But the PBOC’s goal was not a competitive depreciation. The move, part of a planned liberalisation of the FX market, aims to give markets more say in setting the RMB reference rate ahead of the IMF’s decision on whether to include the RMB in the special drawing rights basket. Of course, the PBOC knew that the move would inevitably lead to some depreciation – it had been resisting downward pressure on the currency for months. But that is a far cry from a concerted effort to devalue the RMB in order to boost exports. The PBOC says the necessary adjustment has now occurred, and sees no reason for further depreciation. As a result, while the RMB may fall slightly further in coming days, we think the bulk of the decline has taken place.