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China lets its currency fall in value

Image source: Julinzy, Maximumvector, Globe Turner, Paul Stringer, Jules_Kitano, By Alex Staroseltsev, Anton Starikov, Frederic Legrand - COMEO, Avesun, kubais - Shutterstock

What's going on?

No, not the famous Manchurian hairstyle: investors on Monday were queueing up to pull their money out of global stocks after China allowed the value of its currency to drop dramatically (tweet this).

What does this mean?

China has now lost its status as the US’s top trading partner – and therefore a good deal of its leverage in the two countries’ ongoing trade war. So its government-controlled central bank appeared to respond to the threat of fresh American tariffs on consumer goods imported from China by lowering its currency’s official exchange rate. One US dollar now buys more than seven yuan: the first time that threshold has been breached since the 2008 financial crisis.

The move may be intended to lessen the impact of American tariffs: Chinese goods will now appear cheaper to overseas buyers. But it could have negative consequences in the longer term. With China’s currency worth less, people and businesses will likely rush to send their money abroad as they did after the yuan’s 2015 devaluation. The Chinese government may now have to ramp up existing financial restrictions – and perhaps sell even more US bonds in order to buy yuan and prevent the currency’s value from sliding too far.

Why should I care?

For markets: This is yuan big move.

Global stock markets fell 2% on Monday as investors weighed the darkening prospects for economic (and company profit) growth. And while the value of currencies in growth-sensitive emerging markets like South Korea declined, those of “safe havens” like Japan went up – along with gold, government bonds, and bitcoin.


The bigger picture: Not a good time to be the “Hongkong and Shanghai Banking Corporation”.

British bank HSBC, which retains a big Asian presence, parted ways with its CEO late on Sunday. And much of Hong Kong stayed away from work on Monday, too. The anti-Chinese sovereignty protests that have already contributed to the region’s worst business conditions since 2008 coalesced into a general strike, and Hong Kong stocks fell 3%.

Originally posted as part of the Finimize daily email.

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