Currency News: China’s Yuan Experiences Biggest Fall in 5 Months

Currency News

China’s central bank, the People’s Bank of China, is allowing the country’s currency to devalue in what many see as a risky move for the country as well as the global economy. China appears to be allowing this controlled and gradual deprecation of the yuan in response to outside trader beliefs that the currency is about 10% overvalued compared to the US dollar.

In order to do this, the central bank is using some of its reserves to maintain control while the yuan experiences a steady fall toward market expectations. Patrick Chovanec, managing director and chief strategist at Silvercrest Asset Management, saw only two other options for China’s central bank, either defend the currency or institute a single devaluation substantial enough to give the currency upward pressure from outside traders.

The course of action that the PBOC seems to be taking could set off a chain reaction that would lead to another US recession. If other countries feel the need to lower their own currencies in order to remain competitive with China, it will cause the U.S. dollar to spike in response. A spike in the U.S. dollar will, in turn, cause the value of dollar-denominated commodities and corporate debt to balloon and ultimately stop global growth.

The fear of potential repercussions from any action that the PBOC takes is only exaserbated by investors’ struggle to comprehend the bank’s goals. Official statements point to a possible struggle between conservative stability and liberal reform. While the yuan devalues the most in the past 8 weeks and the local stock market crashes, economists are saying that the economic outlook of this situation is going to rely on reforms.

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