“The risk is that depreciation triggers capital flight, dealing a blow to the stability of China’s financial system,” Orlik said. The calculation from China’s leaders is that with their $3.69 trillion of currency reserves “they can manage any risks,” he said.
The PBOC said Tuesday that a strong yuan puts pressure on exports and cited a high effective exchange rate as a factor behind the devaluation. July’s export slump was deeper than economists predicted, while the nation’s index of producer prices declined 5.4 percent.
“Today’s sudden policy move is a reaction to a significant weakening of China’s export numbers in July and rising deflation risk,” said Liu Li-Gang, the chief Greater China economist at ANZ in Hong Kong.
While the devaluation will help support growth, Liu is predicting that the PBOC will lower lenders’ reserve requirements in August and cut benchmark interest rates this quarter for the fifth time in a year. ∞∞∞∞∞ SEE MORE ∞∞∞∞∞