The global financial establishment reacts poorly to surprises. Traders flee for havens. Investors overreact. The business press takes it all in and then amplifies the sexiest bits.
China’s decision on Tuesday to devalue its currency, the yuan, by 1.9% resulted in chaos. The exchange rates of other Asian countries tumbled, but no one was sure exactly why. Some analysts said it was because the policy shift by the People’s Bank of China showed the Chinese economy was weaker than had been assumed. Others characterized the move as the official beginning of the “currency war.” In other words, traders rushed to sell the Australian dollar, the Korean won and other currencies to get ahead of inevitable countermeasures by the region’s other central banks.
I got caught up in the rush to explain what just happened. Now that a couple of days have passed, it is time to revisit those knee-jerk conclusions. The abruptness of the move remains a reason for pause. That is so because China’s intentions can’t be trusted. For years, Beijing unabashedly tethered the yuan’s value at an advantageous rate against the U.S. dollar. It had behaved better lately, but still lacked a track record of trusting market prices over government fiat. This week’s intervention broke an uneasy trust between President Xi Jinping and global financial markets.
But it’s possible Chinese authorities were clumsy, not malicious.
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