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 "Yuan's decline has been modest when compared with other currencies this year"


Second, the yuan's decline has also been modest when compared with other currencies this year. Among emerging market currencies, Mexican peso and Turkish lira have fallen further, not to mention the Argentine peso. Among the majors, sterling is off 17%, and the Swedish krona has fallen 5.6%.

The yuan's devaluation is also modest in terms of impact on Chinese exports. Due to the structure of Chinese industry, yuan incurred input costs in the country's exports suggest the depreciation is insufficient to have much impact on Chinese competitiveness. Exports (and imports) are lower on a year-over-year basis. This offers prima facia evidence against claims that currency depreciation is reigniting exports for a slowing economy.

Third, the US Treasury seems somewhat more relaxed about the yuan. Rather than escalate the tension between the world's two largest economies, the depreciation of the yuan has not spurred a backlash from the US. Even under the new criteria offered by the Treasury Department, China still does not meet the criteria of a currency manipulator.

Fourth, the Federal Reserve has signaled its intention to hike rates before the end of the year. Even Evans, the dovish Fed President from Chicago recently suggested three hikes before the end of next year may be appropriate. The Federal Reserve's broad trade-weighted measures of the dollar have risen in four of the last five months (through September). The yuan's weakness is partly a function of a stronger dollar. The yuan has depreciated slightly against the basket that PBOC has adopted (though many people and businesses, of course, continue to take decisions based on the dollar-yuan rate). 

Fifth, the PBOC has been intervening to slow the yuan's descent. If it were intervening to push the yuan, as it has sometimes in the past, it would be accumulating reserve assets, not liquidating them. Market forces, which Chinese officials have pledged to embrace, appear to be pushing the yuan down faster. Chinese intervention is to smooth out and make more orderly the yuan's decline.

The performance of Chinese markets and the yuan can once again erupt onto the global stage and disrupt the capital markets. However, the role of the yuan and Chinese stocks in the world economy is modest, and the current pattern may be more sustainable than its markets dictating the investment climate.

Marc Chandler‚Äč
Global head of currency strategy at BBH
Brown Brothers Harriman