Yuan devaluation

Taming the Dragon

Yuan Reuters_distort
Not worth as much as it was last week.
  • Why it matters

    Why it matters

    Without any global regulation, China is likely to further devalue the yuan, damaging unprepared exporters.

  • Facts


    • China has devalued its currency to a record low this week.
    • Analysts are worried the move may spark a currency war to help exporters.
    • China’s economic position of strength means it is able to do as it pleases on monetary policy.
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I still vividly remember the beaming faces. German managers in China profited handsomely from the favorable combination of weak euro and strong yuan. Some earned double from it. Bonuses increased with sales numbers and payment was in yuan.

Of course, they hoped it would continue like that for a long time, but naturally, they knew that someday the high yuan would fall and it would happen on a day when it was more favorable for China and its development to devalue its currency. That day arrived this week.

The executives may not have known exactly when it would come, but talk of devaluation has been in the air over the past few weeks as the Chinese government played all the jokers to keep the faltering Chinese economy from sagging any further.

Now, it has happened and it comes at a bad time for the German economy, though no one in Germany could seriously expect the Chinese government to care whether or not the time is right for Germany. On the contrary, Beijing did everything in its power to prevent anyone from getting wind of the devaluation beforehand, just like all monetary authorities do.

From the Chinese point of view, it’s the right decision at the right time. Anyone caught unprepared is simply not cut out to be a manager in China, as even a devaluation of ten percent could still be called fair.

So long as we lack common global rules, China will continue to do whatever it wants.

This makes accusations that China lured German investors with a cheap yuan pointless. It was clear to everyone China would play its final card.

On the other hand, the claim that the Chinese government is making economic policy with its currency is a valid point. Of course, it is doing that just like all nations do. The strong dollar, the healthy yuan and the weak euro didn’t result only from the free play of markets, but also to no small degree from government policies.

However, there is one major difference between this emerging economy and the mature industrialized nations: While the politicians in the U.S., Europe and Japan increasingly are intervening in the currency, the Chinese now are stepping in less and less. This may please the International Monetary Fund, which has been demanding this for a long time.

Beijing didn’t take action to please the IMF, but because it is better for the nation. In this case, therefore, more market is another form of political self-determination.

Monetary policy has always been national policy, according to the motto, “We have the currency, you have the problem.” It is just that more players have started to play the same game over the past few years.

This means we now must talk about common global rules. So long as we lack them, China will continue to do whatever it wants. That means we need to adjust to the reality that Beijing will devalue the yuan even further.

Personally, that doesn’t bother me. I am paid in euros and my expenses are in yuans in Beijing.

To contact the author: sieren@handelsblatt.com

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