China Devaluation – a global savior?

The Chinese cut the valuation of the Yuan. It was devalued by 1.9% yesterday and 1% today. So, why is this important, are they a demon or savior?

The yuan spiked in 1994 at 8.73 and remained level for about eleven years until 2005. Since then, the government has used devaluation to stabilize it’s market and stimulate growth. And by all accounts, it has worked. China’s economy has burgeoned, and investors around the world have reaped the rewards. So why all the hubbub? It’s certainly not the first time…

The US has placed pressure on China numerous times when the threat of a currency war seemed real. From 2009 through 2010, China allowed appreciation, allowed depreciation, and then agreed on a settlement value. But in 2013, a new player in the war emerged as Japan sought to devalue its currency in order to encourage a better export market. In 2014 it was Germany and in 2015 it was the European Central Bank.

Each time, the rhetoric surrounding the devaluation depends on the global reputation of the country (friend or foe) more than anything relevant. China is perceived as a bad guy and thus when they commit the same move in the currency game, the world cries foul!

But someone was playing the China market, there were rumors of manipulation, then the gold market was hit, again rumors of manipulation given China is heavily invested in gold. Were there forces trying to bring down China’s economy? Perhaps. And perhaps the government saw the next play as a potential Soros styled currency devaluation. Maintaining control would then be imperative. A controlled devaluation cut Soros out of the picture – quickly and succinctly. Baddaboom!

In addition, there are a multitude of outside factors to consider: the decision by China to allow Russia to trade in rubles instead of dollars, the collaboration of Russia, India, China and most of South America, the demand that China be placed in the monetary basket of currencies with US, Japan, Korea and Euro. Add to the mix reports of high supply of oil, more to come as Iran sanctions are lifted, hence lower oil prices, and you have a country that is adjusting to the new global economy.

While the dollar has been strong, US exports have fallen sharply in the last year and could see even greater pressure with the devaluation of the Yuan. So what are we doing?

In a Whitehouse report submitted December 9, 2010, Obama stated that he will achieve the goal of, “Creating Jobs and Growth by Doubling Exports by the End of 2014: Already, the Obama Administration’s efforts to boost trade and exports are producing results. The U.S. remains on pace to double exports, continuing to exceed the 15% annual growth rate required to reach the President’s goal by 2014.”

So let’s take a looksee:

united-states-exports

Nope. October 2014 to March 2015 saw a rollercoaster downhill ride. And our current account to GDP is -2.4%.

So why are we upset? Because the China move will not help elevate Obama out of the rut and in fact may deepen it. What is the US doing to increase exports? They are using as a time frame the low point in the curve compared to the slight increase to create a statistical sample. The same statistical manipulation we continually see as time frames are utilized to create a false truth.

As in the White House report, if exports create jobs, declining exports cost jobs. Who is laying off? Chevron, Disney, Shell, A&P, AmericanExpress, Amazon, BP, Royal Dutch Shell, Microsoft, Intel, Novant Health, Blue Cross, to name just a few.  Who stands to lose most from the devaluation? Automobile makers and chip makers.

But in the greater picture is China’s move a bad one? No. China’s export and import markets had both declined by over 8%. Their role in the global economy is a link to stability.  If their economy were to track down, we would all likely follow. And then we’d be blaming them for not doing something proactive…

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