Will China Devalue Their Currency... What You Need To Know

There has been a lot of talk inside the markets as of late, regarding the Chinese and how they could start more aggressively devaluing their currency. The general and elementary thought is that the Chinese will try and offset U.S. tariffs by devaluing their own currency. This would provide some discount to buyers and importers of Chinese goods, which would help offset some of the premiums added by widespread U.S. tariffs. I should note, the Chinese yuan has gained about +9% against the U.S. dollar since President Trump took office and has been fairly steady in recent weeks despite the escalation of trade tensions between the world's two largest economies. In fact, just this past month, the Chinese currency touched its strongest level since August 2015. While a weak yuan could help shore up China's export industries, a devaluation comes with a bit of risk. Obviously it would further brand China as a currency manipulator but perhaps more importantly it would make it more difficult for Chinese companies to service their mountains of offshore debt. It would also expose China to the risk of local financial market volatility, which is something Chinese officials have worked hard to subdue in recent years. If you remember back to to August 2015 when China unexpectedly devalued the yuan by -2%, the move sent shock-waves through the global markets. Many suspect the volatility and manipulation would spook some of the larger global investors, leading to significant capital outflows. Rather than devaluing their own currency, some insiders believe the Chinese are kicking around a few alternative different ideas, like selling a portion of their U.S. Treasury holdings, of which it held at least $1.2 trillion at the end of last year, or perhaps aggressively targeting and selling select U.S. stocks that are heavily held by the public. If China were to aggressively sell U.S. Treasuries, many suspect it would cause the U.S. dollar exchange rate to weaken, which would in turn make Chinese exports more expensive and U.S. exports more attractive. Bottom-line, there's a ton of moving parts in play right now. We will continue to monitor this situation closely. (Source: Bloomberg)