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China Counters Yuan Devaluation Fears

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What's going on?

Two important, and related, things happened in China in the past few days: 1) data came out suggesting that economic growth is slowing further and 2) an important official said some things that made a big devaluation of its currency appear less likely.

What does this mean?

First of all, data showed that trade between China and other countries in January declined sharply (exports fromand imports into China). That suggests both that China’s demand for foreign products/services has weakened as has the rest of the world’s demand for Chinese products/services.

Secondly, the head of China’s central bank said there was no reason to be concerned about the recent decline in the country’s “reserves” (a.k.a. its piggy bank – read our article) and that “there is no basis for [further] devaluation.” The market interpreted these comments to be supportive of the value of the yuan.

Why should I care?

For markets: China’s intentions for its currency are not totally clear. Since August, it has been pursuing a course of gradual devaluation of the yuan versus the US dollar. At the same time, it has spent a huge amount of money buying yuan in the open market so that it doesn’t fall too quickly. How China is going to try to manage its currency’s value now is somewhat unclear, but it appears to be prioritizing stability over anything else.

The bigger picture: The trade data is actually supportive of China being able to protect its currency. That’s because the data showed that exports from China were at a record high relative to imports into China. That means that foreign money is flowing into China (to the tune of $63.3 billion in January). And that helps offset the money that people have been trying to get out of the country (as they fear, amongst other things, the yuan continuing to get weaker). China, therefore, needs to spend less protecting its currency (although, probably still quite a lot).

Originally posted as part of the Finimize daily email.

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