Matthews Asia Perspective: China Currency Devaluation Update

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Matthews Asia Perspective: China Currency Devaluation Update

Matthews Asia Perspective: China Currency Devaluation Update by Matthews Asia

What are the factors that prompted Chinese authorities to recently devalue the renminbi? Matthews Asia Portfolio Manager Teresa Kong, CFA, examines the lead up and implications of this development.

Q: What happened this week with China’s currency?

A: Since 2005, China’s currency, the renminbi, has had a de facto soft peg to the U.S. dollar (USD). While its central bank, the People’s Bank of China, never explicitly stated how it determines the official daily exchange rate, also known as “fixing,” it was clear that it was largely based on the USD. The intra-day band around which the RMB was allowed to float against this fixing had widened from +/- 0.5% to +/- 2% in March of this year. On August 11, the central bank announced that the fixing, going forward, would be based on the close on the prior day. With one stroke of the pen, the driver of the renminbi fundamentally changed. Its compass changed from that of the U.S. dollar to a more market-driven equilibrium rate.

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