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Two days ago, the People’s Republic of China allowed its currency to devalue against the US Dollar. While it may seem like this is just another hiccup coming from abroad, this one may warrant much more attention. There are many reasons why. Two of those reasons stand out as most important.
Reason 1. China is signalling that all is not as great as it may seem in the global economy. Maybe this is self-evident to you. Maybe not. By allowing the Chinese Yuan to decline, it is making its exports cheaper for the rest of the world to buy. Why would it do this? It is trying to boost its own exports. The issue? Other nations’ exports just become more expensive. So, if two items are largely interchangeable, you buy the cheaper right? That is now more likely to be Made in China.
Reason 2. China answers to one and only one constituency, itself. Make no mistake, even the Chinese characters for China translate to “center (middle, important) nation.” It has no legion of other nations that it must answer to, coddle to, etc. If the international community doesn’t like this policy, China, among nations (well, let’s also include Russia), stands virtually alone, which means that international pressure is very likely to fail.
If you add the two reasons together, then you can understand why global equity markets aren’t enamored: companies that compete with Chinese-company-made products are going to be under price competition pressure, when it is already under pressure. And complaining to China over this? Likely to be for naught.