By Dian Vujovich
No matter how you feel about buying products from China, or selling products to that country, when China fiddles with its currency the whole world feels it.
All of Monday’s plus side moves on the DJIA were wiped out on Tuesday thanks to the People’s Bank of China’s move to devalue its currency the renminbi, commonly referred to as the yuan.
Chinese authorities say the move is a one-time adjustment, but who knows.
What we do know is that the move is going to impact the growing number of Chinese millionaires when they go to purchase any of the luxury goods they love so much like iPhones, Swiss watches, Tiffany and Louis Vuitton kinds of goods. All of them will be more expensive.
On the other hand, the toys and clothes we import and are made in China ought to be cheaper.
As for interest rates, don’t expect the Fed to begin raising rates any time soon as a result of this China play.
Although the real reason behind and the lasting effect or impact of China’s currency devaluation has yet to be realized, China is still somewhat of an emerging market.
Sure the country’s population is huge and the country sports one of the world’s largest economies, but it’s still emerging. And as such, investing in or doing business with any emerging market comes with risks. The three most common are political, accounting and currency risks. Curious how easy it is to forget those realities.
Earlier today I asked Jack Ablin, Chief Investment Officer at BMO Private Bank, to summarize what the devaluation of the yuan means in language we all can understand. Here’s his email response:
“Global growth is slowing and there’s not enough business to go around. Countries have depreciated their currencies, dollar between 2002-2012, euro and yen last year, to put their goods and services on sale in an effort to attain unrealistic growth objectives (market share). Now, Beijing, worried about their slowing economy, is at it. Since Chinese goods are shipped around the world, a cheaper yuan will put downward pressure on inflation. That is a concern for borrowers (Americans including the government) and the Fed.”
That about says it all.
To read more articles, please visit the column archive.