Many factors at play in the devaluation of yuan

Tracey Samuelson Aug 14, 2015
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Many factors at play in the devaluation of yuan

Tracey Samuelson Aug 14, 2015
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COPY

It’s an interesting week in the currency markets, especially for China’s renminbi, which fell in value against the dollar for three straight days.

The devaluation was engineered by Chinese authorities, and some analysts see it as a way to help China’s slowing economy by making its exports cheaper and therefore easier to sell overseas.

Interestingly, the International Monetary Fund greeted the devaluation as a welcome step.

China wants the yuan to be a global reserve currency; one step toward achieving that would be inclusion in basket of currencies that make up the IMF’s reserve assets.

“China does want to be recognized as a member of the Big Boys Club when it comes to currencies and the IMF seal of approval would be important there,” says Eswar Prasad, an economics professor at Cornell University.

China says it wants to let market forces play a bigger role in setting the yuan’s exchange rate, something Prasad says the U.S., the IMF and the rest of the world has been calling for.

But this week’s moves were also part of larger financial reforms that Chinese leaders want to pursue, especially in light of slowing economic growth, says Nick Consonery, with the Eurasia Group.

“The overriding motivation for the government is that they recognize that financial reform is a necessary component of economic restructuring to make the Chinese economy more sustainable over the longer term,” he says.

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