China's RMB depreciation could impact US experts, expert says
China is gradually allowing market forces to impact currency rates while grappling with its slowing economy. This means the US dollar appreciates, hurting prospects for US exporters, according to the Duke University.
"The People's Bank of China is trying to avoid a hard landing for the Chinese economy. However, a relatively minor depreciation, 4%, is unlikely to have much impact on growth," said Campbell Harvey, a Professor specializing in financial markets and global risk management at Duke University's Fuqua School of Business.
"Many of the government statistics are of dubious value. The GDP growth numbers are widely discounted. We do know that exports have fallen and inventories have risen. These are bad omens for future growth and, in part, provide the mercantilist motivation for the devaluation."
This is the largest devaluation since 1994, he said, however, it is still small compared to 1994 when the Chinese currency depreciated by one third.
There is another important force going on, according to Prof Harvey, "One of China's longer term goals is to become a reserve currency. They have been taking small steps toward that goal. They want to be included in the IMF's Special Drawing Rights (SDR) basket. To do that, they need to show that their currency is driven mainly by market forces rather than government controls. To me, they are far from achieving that goal. Even with this devaluation, the float is perceived as very dirty."
The RMB devaluation did not surprise him, as there was the backdrop of slower growth and the stock market bubble being pricked recently.
"If this devaluation persists and becomes more substantial, it could impact the Fed's anticipated September rate hike. This hike will make the US dollar even more attractive to investors and lead to further dollar appreciation with our trading partners. This makes our exports less competitive and hurts US economic growth," said Mr Harvey.
"A hard landing in China, no growth in the Eurozone, Japan in a 20-year stasis, and trouble in emerging markets like Brazil does not bode well for future US growth - devaluation or no devaluation of RMB."
