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Stock markets in free fall?

 

A look at the stock market price charts has been frightening since last week. The question is: is the bull market over and will further heavy losses follow? This article gives you insights into the Chinese economy and provides sound arguments against the emergence of another financial crisis.

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The starting point of the current losses was set by the devaluation of the Chinese yuan. The government decided to revamp the process of determining the currency's reference rate: Instead of using a survey of banks - which determined the yuan's reference rate for that day - the closing rate of the previous trading day now serves as the reference.

With this, the Chinese government is taking another step toward making its currency more freely tradable. The declared goal is to establish the yuan internationally as a reserve currency, just like the U.S. dollar, the euro and the Japanese yen. Since the changeover on August 10, the yuan has depreciated by about 3% against the U.S. dollar in a rapid exchange rate movement.

Many observers see this move as a sign of weakness in the Chinese economy, which exchange rate depreciation is intended to partially combat. There are also fears of an accelerating devaluation race among the emerging markets.

Since the change in procedure on August 10, the yuan has depreciated by about 3% against the U.S. dollar with a rapid exchange rate movement. Many observers see this move as a sign of weakness in the Chinese economy, which exchange rate in https://exnesscom.com/accounts/ depreciation is intended to partially combat. There are also fears of an accelerating devaluation race among the emerging markets.

likely to be a new financial crisis?

A closer look at the facts, however, reveals little justification for these fears. Since 2010, the yuan has appreciated by just under 10% against the US dollar - against the euro it has appreciated by more than 20% and against the Japanese yen by as much as 35%. Looking at the development of the yuan's exchange rate against the currencies of China's trading partners and including the effects resulting from different inflation rates, the yuan appreciated by more than 30%.

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The yuan was thus one of the strongest currencies worldwide. By contrast, the US dollar appreciated by only 10% against the currencies of the USA's trading partners over the past five years. The euro lost 16% in value against the currencies of its trading partners. Against this background, the depreciation of the yuan against the U.S. dollar is more a small correction of past appreciation than the beginning of a currency war. This is also evidenced by the fact that Chinese companies generate just 2% of their sales in the US and Europe.

Conclusion

They generate the rest in emerging markets. This is because the effective exchange rate of the yuan to the currencies of other emerging markets is unlikely to have changed much as a result of the devaluation against the U.S. dollar. China is therefore not gaining a competitive advantage and cannot use it to boost economic growth.

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