China Has Officially Joined the Currency Wars

The only thing China had to wait for was the official inclusion into the International Monetary Fund’s (IMF) reserve currency basket. Now it can devalue its currency as it pleases—and it may not even have a choice.

“A devaluation could be as much as 20 percent against the U.S. dollar because in real effective exchange rate terms the yuan is about 15 percent overvalued at the moment,” says Diana Choyleva, chief economist at Lombard Street Research.

The Chinese currency has gained 15 percent against other major currencies since the middle of last year, according to an analysis by Westpac Strategy Group.

Choyleva thinks the IMF inclusion may have even prevented a sharper one-off devaluation. “They would not be so keen to be a responsible citizen,” she says and expects further gradual devaluation.

Macquarie analysts also believe Beijing now likely won’t “risk their credibility by devaluing the yuan sharply after that.”

But while there is clarity as to how (gradual) and how much (15–20 percent) China will devalue, there is still confusion as to why they have to do it.

Full article: China Has Officially Joined the Currency Wars (The Epoch Times)

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