After many months of market pressure an Asian country devalues, resulting in the biggest crash in its currency in two decades, with a domino effect across the region. Speculators record handsome profits, while emerging markets from Russia to Latin America reel.
China’s devaluation this week drew comparisons to the 1997-98 Asian crisis sparked by Thailand and fears that a repeat is imminent, with disastrous consequences for investors everywhere. The worries should not be dismissed lightly. China says it has moved to a more freely traded currency, not joined the currency wars. But even if it is sincere, a freely traded renminbi would surely fall much further than the 3 per cent drop this week — itself the biggest weekly fall since 1994.
A big depreciation by Asia’s biggest economy would export the deflationary woes of China’s manufacturers. With factory gate prices down for 41 straight months and spare capacity rife, a serious devaluation would threaten the west’s and Japan’s attempts to escape falling prices.