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The currency war intensifies after China devalues the yuan

Business Middle East

The currency war intensifies after China devalues the yuan


One week after the People’s Bank of China devalued the yuan Business Middle East focuses on reactions to the central bank’s latest action which was taken to support the country’s economy.

Reducing the value of the Chinese currency raised many questions and fears in a country considered one of the main engines of the global economy. The devaluation impacted on global stocks, commodities and currencies.

It is a known financial tactic that when the economy stumbles in a country, central banks intervene. For example, what happened with quantitative easing in the US, Japan and the eurozone. It is no different to what China did, so why did the devaluation of the yuan reverberate around the globe in the way it did?

China’s decision to reduce the value of its currency last Tuesday by two percent, led to the yuan falling to its lowest level in 20 years. That surprise was followed by the second on Wednesday to reduce it by 1.06% and on Thursday, there was a third reduction of 1.11%.

A combination of factors pushed Beijing to make this decision mainly, the latest losses in stock markets, especially the Shanghai composite index and recent data which showed exports fell by 8.3 percent in the month of July. The forecast for growth also showed a fall, dropping to less than 7 percent.

China’s currency over the past years was considered one of the most stable but the strong yuan put a lot of pressure on Chinese exports.

In one week following devaluation, the yuan depreciated against the global currencies basket. It fell against the dollar by 2.92% and 3.89% against the euro.

The People’s Bank of China’s decision impacted on global and MENA stock markets , especially in GCC stocks. Many of them ended the second week of August in the red. The Dubai index for instance fell by 3.35% at the same time estimates showed that total value of UAE stocks dropped by about 18 billion dirhams – around four million euros.

Analysts differ on the devaluation of the yuan. Some believe the decision caused a negative impact while others argue that China’s central bank’s actions were a natural and logical step to help business in China.

For more on the topic Nour Eldeen al Hammoury, chief market strategist at ADS Securities, joined the programme from Abu Dhabi.

Daleen Hassan euronews:
“With differing views on Beijing’s actions do you agree with analysts saying that China has started a currency war and markets could witness more negative effects.?”

Nour Aldeen Al Hammoury:
“The currency war is not something new to the market, the war has been there since the financial crisis, when countries were weighing on their currencies as a tool to stimulate the economies. However, we can say that the war may accelerate more than ever. However, such wars always bring new opportunities, therefore, we can’t say whether it’s positive or negative, but what we know is that it brings new opportunities in trading and investing. The PBoC decision is seen as a reform action and we see it as a normal decision.”

Daleen Hassan euronews:
“Many concerns have been raised due to the devaluation, what will be the repercussions on the currency’s trading activity in the upcoming period, particularly in the Middle East?”

Nour Aldeen Al Hammoury:
“The declining Chinese Yuan had a notable negative impact on the global equities, including the Middle East markets. The CNH “yuan “devaluation led to a sharp increase in USD initially before declining again at the end of last week, which led to oil prices falling further to new levels for the year. Thus, Middle East markets’ fears from declining oil have reemerged on the surface, as falling oil prices will continue to affect the GCC budgets.

‘Saudi Arabia had to go back to the bond market in order to keep the current spending levels. The market took such an action as a negative sign, leading to a sharp sell-off in regional equities. This is despite the fact that Saudi’s debt to GDP ratio is at only at 1.6% and is the lowest in the world.

‘On the other hand, we don’t see a notable decline in the Chinese yuan from now on. Moreover, the PBoC made it clear that talk about a 10% decline in the Yuan is nonsense. The bank also expected the Yuan to rise again in time. Here at ADS Securities we are still seeing a notable demand on the Chinese yuan across our platforms, whether in Asia, Middle East or Europe. Therefore, we believe that traders and investors should not overreact to the PBoC action and should not fear it.”

Daleen Hassan euronews:
“The International Monetary Fund welcomed the devaluation of the yuan. Do you think this a sign that the yuan is very close to joining the global currency basket?”

Nour Aldeen Al Hammoury:
“The IMF was the first to welcome the move by the PBoC. This is more evidence that China is doing the right thing and that this intervention is already needed and healthy. Moreover, this is a positive factor for China’s request to join the global currency basket. China’s action was a clear message to the IMF and to the world, that it is ready to join the basket.”

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