We had been warned. China has long been committed to a gradual internationalisation of its currency and a greater role for market forces in the economy. Yet the effects of yesterday’s 2 per cent devaluation in the renminbi have been widespread. Companies and investors should get used to this volatility. There will be more of it.
The People’s Bank of China said that the change to its daily fix was “a one-off adjustment” reflecting a desire to decouple the renminbi from a strengthening US dollar. But it also said that its daily rate fix would in future better reflect market forces. Logically, more depreciation should follow; economic growth is slowing, capital is fleeing and the currency was already overvalued on an inflation-adjusted, trade-weighted basis.
Stock markets have already sorted the likely winners from losers; broadly, devaluation is deemed good for Chinese exporters. It is deemed bad for US, European and Japanese companies selling into China — partly because it may crimp sales and profits in their home currencies — but more because of what resorting to devaluation says about the state of the Chinese economy. No wonder shares in the likes of Burberry