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The Yuan’s devaluation has made investors nervous

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Earlier this week, the Chinese yuan broke the seven-to-one parity against the dollar for the first time since 2008. The People’s Bank of China, which had maintained this level consistently till now, deliberately moved to devalue the Chinese currency after the latest tariff threats issued by US President Donald Trump. The act marks a shift of focus in the current trade tensions between the US and China away from what was seen as a “tariff war" to a potential “currency war". And this spells greater risks not only for those trading in US and Chinese currencies or their stocks (over 60% of global financial investors), but also for capital flows between emerging markets that tend to peg the value of their own currencies to the dollar. So, how does one interpret the possible economic and political reasons for China’s latest currency move?

Let’s start with the economic aspect. A weaker yuan does have certain benefits. All else being equal, China’s own manufacturing competitiveness, which has otherwise been weakening, is likely to strengthen with yuan-priced goods and services getting cheaper across supply chains in East Asia, parts of Africa, etc. It is likely to widen China’s trade surplus with the US in the immediate short run. It will also help China expand trade margins within its own region, especially with Vietnam, Thailand,........

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