Chinese markets soared Monday on the hopes that Beijing, cape billowing in the wind, would once again swoop in to save the day after the recent release of weaker-than-expected pricing and trade reports.
On Tuesday, China’s investors got their wish, as the government devalued the nation’s currency in a move that will make Chinese exports more affordable while putting pressure on international competitors.
“Today China allowed the yuan to depreciate 1.9 percent against the U.S. dollar,” Gus Faucher, a senior vice president and macroeconomist with The PNC Financial Services Group, wrote in a research note Tuesday. “The devaluation will make Chinese-made goods less expensive and imports to China more expensive. This should support growth in China, which has slowed in 2015, … although it will hurt Chinese consumers by making goods, especially imported goods, more expensive.”
The move comes only days after a trade report showed Chinese exports in July dropped 8.3 percent year over year and 14.6 percent in the first seven months of the year compared with the same window in 2014. Imports, meanwhile, fell 8.1 percent year over year in July and were down 0.8 percent in the first seven months of the year.
“I think it’s screaming that China is in trouble,” Boris Schlossberg, a managing director with BK Asset Management, said Tuesday in an interview on CNBC’s ” Squawk Box.” “The trade data over the weekend was sort of the biggest, when both imports and exports contracted by more than 8 percent.”
The especially weak export figures have been a rarity in China, as the nation has been hailed for years as Asia’s manufacturing and trade juggernaut. But a devalued currency will likely bolster the country’s weak performance while heaping pressure on competitors who could now potentially be priced out in the international marketplace.
“China is obviously concerned about its economic growth, and this devaluation will make their goods more competitive in export markets,” John Carey, executive vice president and portfolio manager with Pioneer Investments, said Tuesday in an interview on CNBC’s ” Wall Street Wrap.” “They’re concerned not only about Europe and the U.S. and Latin America but about other Asian countries. They have significant and growing competition from lower wage-cost countries in Asia with also some very dynamic economies.”
The weaker currency’s impact on Chinese consumers also could potentially hurt those who export to China.
For example, if a firm in Europe buys parts that are produced in both China and the U.S., but foreign exchange rates and currency valuations favor China, U.S. businesses will ultimately lose out. American exports, and therefore gross domestic product growth, then will suffer. And if the U.S. elects to increase its imports from China, U.S. GDP will be further weighed down.
“China says that this is a one-time move, but further devaluations could be in the cards,” Faucher said. “Trade is already expected to be a drag on U.S. growth in the second half of this year, and that drag will now be somewhat larger.”
The devaluation couldn’t have come at a worse time for the Federal Reserve, which is weighing the timing of America’s first interest rate hike since 2006. One of the side effects of a rate hike is currency strengthening, so the already strong dollar would move even further away from being competitive with the yuan.
“Now even a small increase in rates in September could have a magnified effect on the value of the dollar, given this devaluation of this Chinese currency,” Carey said. “It will put the U.S. in an even more difficult competitive position in its exporting markets now that we’ve had so many devaluations around the world, and most notably this devaluation from China.”
Fed officials have repeatedly voiced that they prioritize U.S. economic health and indicators over international news, but it’s also clear that developments abroad play at least a minor role in decision-making. China’s devaluation of its currency will undoubtedly soften the case for a September rate hike, especially in the absence of meaningful domestic inflation indicators.
“We’re clearly moving now from a point where we used to have [international] currency cooperation between most central banks to now currency competition,” Schlossberg said Tuesday. “And the fact that China gave its tell that things are not going that well over there may make [the Fed] pause.”
Whether China’s tinkering is enough to completely derail a September move by the Fed remains to be seen. The next likely opportunity for the Fed to raise rates would be December, unless it elects to forego a 2015 rate hike altogether.
“I think what they’re probably going to do if they hike rates in September is that they’re going to say, ‘We’re going to do this, but we’re not going to do anything [else] for a long time coming,'” Schlossberg said. “I think this makes it much more likely they’re going to hold.”
More from U.S. News
Chinese Stocks Rally Despite Underwhelming Industrial Data
Europe’s migration wave: Latest developments
Donald Trump Testing Fellow Republican Candidates’ Messaging
China’s Devalued Yuan Currency Could Drag on U.S. originally appeared on usnews.com
