Economy

Could China Devaluing the Yuan Actually be Good Long-Term?

Telling US exporters that their goods are going to be even less competitive is not likely going to sound like good news. Neither is deflation. And China’s recent surprise devaluation move of the yuan (Renminbi/RmB) hurt financial markets because it will make US goods more expensive on an export basis and it effectively allows China to export deflationary pressure at a time when global central banks would prefer to see inflation come back into the system.

It is often very helpful to think about big changes in the after the dust has settled. That being said, what if the devaluation move out of China actually ends up being good in the long run? Admittedly, it is hard to take much good news from it for today or tomorrow – particularly just weeks ahead of an expected rate hike from the Federal Reserve. This could end up in the longer term being a different issue entirely.

China’s economy remains driven by exports. It depends upon shipping goods to the United States, Europe, and elsewhere. The problem is that China wants to have a much broader domestic demand economy, while it has by and large been pegged to the U.S. dollar.

24/7 Wall St. picked up several different report summaries from various firms since China’s surprising devaluation. There are still many opinions which differ on what will really happen, but these are at least some after the fact thoughts.

Credit Suisse believes that the RmB will end up depreciating a little more than the forward curve of about 3% is currently anticipating. It pointed to the IMF note believing the currency is no longer undervalued. Credit Suisse thinks that a decline in excess of 10% is unlikely, pointing to the belief that the RmB is 5% to 10% overvalued.

Moody’s recently opined that China’s exchange rate reform is credit positive for the sovereign rating. It thinks that this will support the authorities’ objectives of capital account liberalization and increased currency flexibility. It also thinks the new exchange regime is not enough to significantly benefit exports and growth.

The IMF believes that China is transitioning to slower but better growth. This sustainable growth move involves giving the market a more decisive role in the economy, and this slowdown reflects progress in addressing vulnerabilities such as a needed moderation in real estate investment. The IMF says that the recent stock market correction will not derail the ongoing adjustment to a slower yet more balanced growth path.

Fitch opined on several aspects of the devaluation. That ratings agency showed that the devaluation holds a mixed impact for US corporate quality. It said: “China’s currency change will likely hurt foreign revenue and cash flow generated overseas by multinational issuers while some beneficiaries gain from cheaper imports.”

The Wall Street Journal note was that the Yuan isn’t ready to be a global reserve currency. The view there is that reserve currencies aren’t decided by a bureaucrat’s pen; they depend on economic fundamentals.

Merrill Lynch sees China’s goal as an attempt to stem the weakness in China’s exports after those were down 8% for the 12 months ended July. The firm sees additional stimulus measures coming, with a 100 basis point cut in the required reserve ratio by the end of the year. That reserve ratio is 18% now, and the firm thinks that ratio could normalize at 10% in future years.

These may be very shortened views, but the goal is try to think beyond the headlines of today.