Adding to the already crazy financial year thus far, China recently devalued its currency by around 4.4%. This devaluation has been the most dramatic since the country set up its modern exchange system back in 1994. Stock markets around the globe reacted to this recent devaluation, but none of them reeled as much as some expected, likely do to the current strength of America’s economy. However, this devaluation adds more speculation about the already occurring currency wars, especially with countries in the same area as China such as Japan and Australia, and raises new questions about the Chinese financial system, which remains largely under the control and manipulation of the government.
This devaluation comes at the heels of the recent stock market struggle China faced starting back in the middle of June. Many Chinese citizens took out loans to invest in the stock market during a time when the stock market was doing surprisingly well. As imagined, that could not last and the market hit a wall during the early summer. During that time the Chinese government intervened in the stock market in order to keep prices from plummeting even more than they did. During that time the Chinese Government barred major shareholders from selling stock while ordering state agencies and entities to buy stock with financial backing from state banks. Despite this intervention, the Chinese stock market fell substantially.
A devalued currency gives an economy an advantage in the export business. Devaluing a currency can give an economy a boost in the amount of trade it does because it is suddenly cheaper to do business in and export goods from that economy. One prominent economist likened the situation to a massive nationwide sale. Basically, because the price of goods are listed in the Yuan, and the Yuan dropped around 4.4%, the prices of all the goods for sale in china were effectively reduced by 4.4%. It follows that goods would be more expensive to import into China. So American imports to China would cost 4.4% more.
China has long been suspected of artificially manipulating its currency. During the 2008 recession the low Yuan was blamed for the slow economic recovery in the United States. This time may be different, as China’s economy has been slowing down for some time and some economists believe the Government may be trying to prevent more devaluation.
In these times of uncertainty and changes in the marketplace, Cambridge Realty Capital is positioned to ensure your finances are taken care of. We pride ourselves on our long-term and secure approach no matter what factors may affect the global market. We are confident in our approach and analysis of the financial markets and know that whatever difficulties lie ahead, we are ahead of the curve.
