China announced a 1.9% devaluation in the value of the Renminbi currency versus the US dollar on Tuesday and a further 1.6% devaluation on Wednesday. As the value of the Renminbi is set via a managed float, with only minor short-term moves, this has caught many by surprise. Some fear that the move is sparking talk of new competitive currency devaluations. As a result, we have seen Asian and emerging market currencies, commodity prices and global share markets fall in response. This note looks at what it all means for markets.

Putting the changes in perspective

What are the implications?

There are several implications. Firstly, the move reflects an ongoing stimulus program to help Chinese economic growth. Secondly, the risks are that there could be a further depreciation of the Renminbi to come. However, with China running a big trade surplus and its share of global exports still rising, a major depreciation is unlikely with the focus likely to remain on more domestic monetary easing and fiscal stimulus. Thirdly, downwards pressure will likely remain on the currencies of countries that China competes with otherwise they are likely to become less competitive. In light of this, expect more downwards pressure on other Asian and emerging market currencies. Finally, with China devaluing its currency, this puts pressure on developed countries to maintain or accelerate easy monetary policies and could, at the margin, delay the Federal Reserve from tightening in September. In aggregate, this should help global growth at the margin and, as a result, share markets over the medium-term. Looking beyond short-term uncertainties, the move towards a more flexible Renminbi should be positive for global growth and stability, but we are still some way from this yet.

About the Author

Dr Shane Oliver, Head of Investment Strategy and Chief Economist

Dr Shane Oliver is Chief Economist and Head of the Investment Strategy and Economics team at AMP Capital. The team is responsible for the provision of economic and macro investment analysis, and determines the asset allocation policy which is applied across AMP Capital’s multi-asset funds.

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