China has revealed the mystery of devaluation?

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In a recent post, I listed the main versions of what prompted China’s lawmakers to devalue the national currency. Let me remind you that according to the official version he weakening of the yuan is the next step towards the exchange-rate fix. However, many experts suspect Beijing in an effort to support its exporters on the back of a slowdown in this sector of the country’s economy. After all, over the past seven months of 2015 the volume of exports from China decreased compared to the same period of last year by nearly 1%, and in July this decline exceeded 8% y/y.

Yesterday’s interview with China’s representative of the Ministry of Commerce Shen Danyang indirectly indicates that the need to support export industries was indeed taken into account when deciding on the devaluation.

Shen Danyang admitted that the situation with exports proved more difficult than the government had expected and pointed out the reasons for the annual rate’s collapse in July:

  • long-term strengthening of the Yuan’s exchange rate,
  • growing labor costs in the manufacturing and export sectors
  • the effect of basis of comparison

Leaving aside the statistical effects (economic policy can’t affect them), we see that the other two reasons point directly to the need of devaluation.

In fact, if China’s authorities believe that continuing strengthening of the yuan against the US dollar has undermined the competiveness of domestic producers on the world market, it would be logical to weaken the national currency. Similarly, if they believe that the increase in the salary component of the exported from China goods has made them too expensive for foreign buyers, it would be logical to devalue the yuan too. Because then, paying workers the same salary in the RMB, companies will be able to fill the wage fund due to a smaller volume of foreign exchange earnings. And it will help reduce export prices.

After Shen Danyang enumerated the causes China’s problems in the foreign trade, he should’ve only added: “That is why we devalued the yuan.” But he did not. After the recent announcement of the State Council supporting exports was the main task of the year, everything was clear without any words…

 

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About Author

I have been friend with currency market since 2006. I hope that this friendship is not only useful to me, because over the years I have repeatedly provided analytical services to various companies and media outlets. I love fundamental analysis. Every day, I am convinced that the statistics is not boring numbers but fascinating reading, which, moreover, can predict the future. Technical analysis is also not neglected, especially as my hobby - finding effective algorithms for automated trading systems.