The Implications of China’s Renminbi Devaluation

August 19, 2015

By Robert O’Neill

Frankel: Both factors are very relevant, the slowing economy and the steps toward increased flexibility. Ten years ago, exhortations to let the exchange rate be determined in the market implied letting the yuan appreciate. But since mid-2014, market forces — especially due to the slowing Chinese economy — have been working to push the yuan down, not up.

Most of our major trading partners have recently experienced slowing economies, monetary easing, and (as a result) depreciating currencies. This is relative to the U.S. economy, which has been performing better, allowing an end to monetary easing and so a strengthening of the dollar.

letting the value of the yuan be determined in the market. This is what American politicians still say they want. One implication for the longer term is increased volatility in the exchange rate. Another implication, for the shorter term, is that there may be further depreciation of the yuan against the dollar, making it easier for Chinese firms to compete against American firms.