China Devalues its Currency

Shanghai business district

Photo courtesy of Michael Bush, Thursday Review contributor

China Devalues its Currency
| published August 12, 2015 |

By Thursday Review staff

International markets saw stocks slide across the board in the wake of Beijing’s decision to again devalue the yuan, the Chinese currency. China’s decision to lower its currency was meant to attract buyers of government bonds, but the Chinese stock market slump is triggering market tumbles on every continent.

China has seen months of stock market declines, including a late July dip which saw some 10% of total market value evaporate. Beijing has tried several large-scale remedies to halt the slide, but some market analysts say that confidence in the yuan is extremely low, and that fears of a bubble have taken hold among millions of investors.

A recent worldwide slump in oil prices—with predictions of oil falling even further—have also triggered problems for dozens of countries in addition to China. The ripple effect is expanding past the Chinese markets and into those companies and countries which do business inside the Asian superpower’s borders—triggering problems for markets in Germany, Brazil, Indonesia, and the already troubled Russian economy.

Experts have blamed a combination of indecision and poor management by Beijing on the deepening problems for China. Wednesday’s decision by the central bank to lower the yuan by nearly 2% came as a surprise, however, and many stock markets reacted with sharp negative sell-offs.

Officials in Beijing have blamed much of the problem on short sellers, and starting in July began imposing rules in an attempt to halt the rapid decline in values, and to boost confidence that China’s previous periods of growth were not part of a larger bubble. “Short selling” is the process of rapidly “borrowing” stocks and then selling them, wagering that the stocks can be bought back—within hours or days—at a lower price, allowing the short seller to make a fast profit on a stock they never actually owned. Legal in most markets, the process can work to the disadvantage of a government when things turn south as investors begin a stampede of selling, with the short sellers often riding (and profiting) on the selloff.

Beijing wants investors to stop betting that its markets will fail.

Officials in Beijing and Shanghai have greatly limited any form of short selling, and the only short selling allowed is by certain trading firms approved by the government. Historically, central banks and governments sometimes step in to limit or discourage short selling when an economy is in crisis—as the U.S. Federal Reserve and U.S. Treasury Department did in late 2008, and as Greece has done over the last few months. However, skeptics suggest that Beijing's crackdown on short-sellers is a distraction from its bigger economic problems, and some analysts think that officials in Beijing will eventually have to confront the problems triggered by its market bubble.

Some analysts are confident that China can rebound from its current market woes, which many believe may be a part of a larger—and much overdue—correction.

Related Thursday Review articles:

Chinese Stocks Slump Across the Board; Thursday Review; July 27, 2015.

Greek Default Could Have Wide Impact; Thursday Review; June 30, 2015.