China’s devaluation of the yuan presents challenges
China devalued its currency, which caused chaos for its markets today.
When it comes to the day-to-day value of its currency … China’s central bank sets rules for itself. Each day it allows China’s currency to appreciate or depreciate based on market fluctuations up to 2 percent in either direction. So today the central bank claimed it let its currency depreciate to show the rest of the world that China was liberalizing its economy.
Schmitz adds that this is mostly just for show. “One might argue that if they really wanted market forces to take their natural course, they’d get rid of this 2 percent rule and just let it go.” What the government is doing right now is a far cry from what a liberal, free market economy looks like.
China’s spent months boasting about how free the Shanghai stock exchange was. Then the whole thing crashes, and then the government rushes in to punish people who let it crash. You know, so much for a free market economy
But Schmitz also says that some of the hiccups are understandable. “No economy of this size has embarked on a journey like this,” he says.
So what seemed to be a disaster might not be as bad as critics are saying. Schmitz says ultimately, “it shows the government might be serious about reforming the Chinese economy. It might seem strange, but I think all of these failures are a sign of progress.”
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