China devalued the Yuan today, sending shock waves through the international capital markets and exchanges. Yet, this devaluation should not have come as a surprise to anyone. And, no, it is not because the Chinese economy is slowing down, burning out or anticipating a bubble in any of its domestic investment markets -- China's economy is quite healthy, but will likely experience a slowdown during these next two years due to a decline in the traditionally high marginal propensity to save, increased dependence on leverage, illiquidity in its sovereign investments (Greek bonds, anyone?), and increased competition for inexpensive labor and production from other emerging nations. The Chinese stock exchange is just going though a period of adjustment -- it's not a sign of recession (the recession story is just wishful thinking and propaganda coming out of the West).
The real reasons that the Yuan was deliberately devalued today had everything to do with two factors:
1) China is demonstrating to the world and the IMF that its native currency is no longer tightly tied to the value of the United States Dollar and can be valued separately and independently in its own right. This is because the Chinese government is positioning the Yuan to eventually become one of the preferred and officially accepted reserve currencies in the IMF's monetary basket, which will strengthen the Yuan's standing worldwide, and will consequently weaken the U.S. Dollar's standing worldwide [this re-evaluation of the currencies in the market basket is predicted by many economists and political pundits to occur in mid to late October, this year, although China might not "get in" under the wire and may have to wait to the next market re-evaluation in 2016]; and,
2) China, in lowering the value of its currency vis-a-vis the value of other world currencies, will be able to rapidly strengthen its slightly weakening export competitiveness, and help to reboot and boost its temporarily soft stock market through an improvement in its balance of trade, balance of payments and it penetration of worldwide consumer markets.
For further information about this strategic and premeditated devaluation, you may wish to look at these articles:
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Douglas Castle for Global Edge International Consulting Associates, Inc. and The Global Edge International Blog
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