The devaluation of China’s yuan signals concerns about the growth prospects for the economic powerhouse, notes a new report from CIBC World Markets Inc.
The report, written by CIBC chief economist Avery Shenfeld and senior economist Nick Exorhas, suggest the move is an effort to help boost growth in the Chinese economy.
China’s central bank surprised markets Tuesday by allowing the yuan to depreciate by about 2% relative to the U.S. dollar, back to 2012 levels.
In addition, Chinese policymakers also changed the method for fixing the exchange rate, which could lead to further weakness in the currency.
“It’s worth noting that the yuan is far from weak against the currencies of its non-U.S. trading partners, which have all been sliding more materially against the dollar,” the report says. “Given the challenges that has posed to China’s export performance, the yuan might have gotten to an overall overvalued level, which would imply room for a further weakening.”
CIBC expects these latest policy moves, coupled with other recent actions, “to lift Chinese growth in 2016 in the segments of the economy fed by Canadian materials exports, but for now, concerns over subdued growth in this key market will be a negative for sentiment in the resource space.”
“Other impacts of the exchange rate move, will be minimal,” says the report, adding “unless we see a very dramatic move, a weaker yuan won’t have much of an impact in dampening inflation in Canada, since the cost of goods leaving China is often a minor part of the final selling price here, with much of the value added in transportation, wholesaling and retailing.”
China’s neighbours, however, may feel pressure from a devalued yuan, according to Kara Lilly, investment strategist with Mawer Investment Management Ltd.
“China devaluing its currency matters, because it risks sparking a new currency war and destabilizing the region. It’s a game of musical chairs where no one wins. A materially cheaper yuan would make things more difficult for the other nearby Asian economies (because their exports become less competitive) and will put pressure on the U.S. through a higher dollar,” says Lilly in a statement.