The continuing international effect of China’s currency devaluation

What will be in store for the Chinese currency in coming months?

What will be in store for the Chinese currency in coming months?

In August 2015 the People’s Bank of China took the surprising steps of devaluing its currency, the yuan, three consecutive times which knocked 3% off its value. This marked the single largest drop in 20 years and had a knock on effect for the rest of the world.

Due to this unexpected action it has been hard to predict the yuan’s future, with some believing it is set for a further 6% decline over the next 12 months. The initial effects weren’t too severe but with the continuing disarray it is set to still affect the rest of the world.

Neighbouring countries’ economies

The currencies of Australia, Malaysia and South Korea all fell in reaction to the Chinese yuan devaluation at the time. The worry for many of its neighbouring countries and those which rely on China for trade is that further decline will also lead to drops in their own national currencies.

The weakening of certain currencies as a result of China’s devaluation has made currency exchange even more affordable in such nations. This could help more businesses grow through using Ebury in China and surrounding countries when such a good exchange rate exists.

Global commodities

With cheaper yuan it meant that China would pay less for oil, copper, coal and other commodities. This had a knock on effect with the global prices for such commodities dropping that meant it was cheaper for consumers filling up their cars but for businesses exporting to China it made it much more difficult.

The stock market and international trading has felt the aftershocks too, with China’s own stock market closing after just 29 minutes in early January. The Chinese share market collapsed by about 8% at this time too and though it has recovered slightly in the past few weeks not everything is perfect.

The unpredictability effect

There is a lot of uncertainty about what lies in store for the Chinese yuan in the coming months and in turn this provides plenty of worry for the global market. Neighbouring countries and those which rely heavily on China for trade, such as Australia, will fear the worst if the yuan does decline further.

Others are predicting a massive one time devaluation rather than just a number of smaller ones like in the summer of 2015. However, China seems to be seeking stability and making suck big waves in the international financial market is unlikely to achieve this.

Related Topics