In the August 2015 economic update video for eZonomics, senior economist Bert Colijn tells how the Chinese Central Bank changed policy in early August.
“The official explanation is that they want markets to influence the price of the yuan more,” says Colijn.
Made in China on sale?
Colijn says the Chinese economy had been suffering from deteriorating growth and a stock market crash.
The intervention saw China’s currency – the yuan – have its sharpest depreciation against other currencies since the mid-1990s.
“Because of the depreciation, your ‘made in China’ products will become cheaper,” he says. “The other side of the coin is that business owners selling to China could see a negative effect on sales, as imports become more expensive for the Chinese.”
In past years, several countries have intervened in currency markets – but, when used in the extreme, “competitive devaluations” can risk sparking a currency war.
The currency in China has two names, as the BBC explains, with the yuan the name of the unit (similar to pounds in the UK), while the renminbi the official name (similar to sterling in the UK).
Effects on other countries and currencies vary
Colijn says the extent of the depreciation is not yet fully known, but the effects could possibly be far-reaching.
“Stock markets and other currencies, especially in emerging markets could weaken,” he says. “It could even influence the timing of increases in central bank rates in the US and UK, although this is not the scenario currently deemed most likely.”