The Financial Times headline story claims that “China risks clash with US as 19% devaluation surprises markets”. The text provides no support for the claim, except a quote from Senator Schumer who has tried and failed several times to toughen up US laws on currency manipulation. The FT notes that “The US Treasury offered a cautious welcome, saying the changes were “another step in [China's] move to more market-determined exchange rates…”
Both the US Treasury and IMF are reserving judgment to see how China implements its new commitment to give market forces greater sway in determining the yuan's exchange value. In the current environment, those market forces favor further depreciation of the yuan. PBOC officials, however, not only intervened earlier today to stem the yuan's sell-ff but they also offered several arguments against expectations for a sharp depreciation, like its current account surplus and large reserve holdings.
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Chinese official had referred to the yuan's strength on trade-weighted measure. This was a function of its seeming peg to the dollar. China has effectively abandoned the peg. Some observers and news outlets have consistently framed issues over the past several years as a currency war, where countries seek advantage by depreciating their currency.
We have argued this was simplistic as many countries have or are intervening to prevent their currencies from weakening too much or too fast. We have also noted that adjusting monetary policy in the face of weak growth or falling inflation or actual deflation ought not be regarded as an act of (currency) war.
This Great Graphic was posted on business Insider by Myles Udland. It shows the the yuan's weighting in various countries trade-weighted indices. It shows the importance of the yuan for South Korea and Taiwan (both are above 25%). Chile is third in the chart near 23%, followed by the US at a little more than 20%. The key is assessing the impact of the weaker yuan is the magnitude of the move. The yuan's move thus far, offsets some but not all of the yuan's trade-weighted gains. It is hard to call the yuan weak. It is less strong.
