5 reasons for China not to devalue yuan

February 25, 2015 09:56 AM

Could China's yuan renminbi be the next domino to fall in the increasingly aggressive efforts by central banks to devalue their currencies? The People's Bank of China holds considerable sway in the forex market and if it were to follow other Asian central banks an all out regional currency war could swiftly follow.

The Eurozone, Japan and now Sweden all have quantitative easing programmes. Across Asia central banks have been cutting interest rates partly in response to Japan's aggressive devaluation policies. 

If China were to join the fray other Asian central banks are likely to respond very quickly -- possibly even going as far imposing negative interest rates. If Europe is anything to go by, the European Central Bank's soon to start quantitative easing programme has seen Switzerland, Sweden and Denmark instigate negative interest rates. Even the Bank of England has left open the possibility of lowering its base rate from 0.5%.

Meanwhile, the CNY has been one of the best performing currencies in the world, largely thanks to its loose peg with the soaring dollar. However, inflation pressures are cooling, the pace of growth is slowing and some exporters are struggling to remain competitive. Within China there are calls for a weaker currency. Also, it is by no means certain that China will pursue such a policy.

Fate of USD/SGD partly in the hands of the People's Bank of China


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About the Author

Justin Pugsley is the forex and gold markets analyst for New Zealand-based trading platform provider MahiFX. He is a keen student of markets, economics and history. Prior to working with MahiFX, Justin worked for a number of leading media organisations such as Thomson-Reuters and Dow Jones/Wall Street Journal.