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Chinese currency devaluation – what it signals
On August 11, China’s central bank announced the largest one-day devaluation of its currency in two decades, reducing its target level by 1.9% against the USD.
We believe this development is drastic and is negative for two key reasons:
Chinese policymakers are opting for some short-term breathing space at the expense of some much bigger problems down the road. We expect the stresses in the Chinese banking sector (blog post comings soon) will only deteriorate further as a result of this decision.
What follows is a brief summary of the framework we use to think about the Chinese economy. The conclusions that we draw above are direct outcomes of our framework that we describe below.
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FRAMEWORK TO THINK ABOUT CHINESE ECONOMY
THE CURRENT STATE OF THE CHINESE UNION
TO REMEDY THE “UNDERCONSUMPTION” PROBLEM: REBALANCING
THEREFORE, CHINA SHOULD NOT DEVALUE ITS CURRENCY
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Of course, China has now weakened its currency. The message is clear: economic rebalancing is off the table. Watch now for retaliation from other nations.
Andrew Macken is a Portfolio Manager with Montgomery Global Investment Management. To learn more about Montaka, please call +612 7202 0100.
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