Travel back to 1984, to a time when a simple question could spark a nationwide meat-craving frenzy. Wendy’s debuted their now-iconic “Where’s the Beef?” commercial, starring Clara Peller as an old lady demanding more meat from her fast-food hamburger.
Investors are now asking China “Where’s the growth”? The second largest economy has been hiding their economic beef under a large bun of secrecy. China’s surprise devaluation of its currency is a sign of economic weakness.
The People’s Bank of China on Tuesday implemented a one-time depreciation of nearly 2 percent to the yuan to levels last seen three years ago against the dollar. The move was also the biggest one-day fall since a massive devaluation in 1994. Don’t be surprise if the devaluation continues to the 5% to 10% level over the coming months.
It looks as though the weakened trade numbers were the last straw for China’s tolerance of a strong exchange rate in the face of weak global demand for its exports. Chinese exports slumped 8.3 percent in July, the biggest drop in four months and far worse than expectations for a 1 percent fall. Exports to the European Union fell 12.3 percent in July while those to the United States dropped 1.3 percent.
The currency move also comes amid a shaky Chinese stock market, which the government has been trying to stabilize. The Shanghai composite has rocketed more than 80 percent higher over the past 12 months but has plunged 23 percent since hitting a seven-year high on June 12.
Is the Chinese leadership starting to run scared? I am thinking that China may be in real trouble! The price of commodities are at recession lows. Devaluation makes commodities even more expensive and the rebound in the price of oil will not materialized anytime soon. Which raises the question, “Is it an oversupply problem or lack of demand?
Now, I have never trusted the GDP numbers coming out of China but I am starting to wonder if the economic beef underneath the bun is a lot smaller than many market watchers believe. I am scratching my head. China has been trying to shift away from an export driven economy and create a domestic market for Chinese goods. Have they given up?
My Friend at “Bear with the Bull” and I have similar thoughts on China.
When the government of the second largest economy in the world decides to devalue its currency, people, companies, and indeed the entire world notice. That is what happened this past week when China devalued its currency, the yuan.
But what does that really mean? And how does it affect the rest of us?
Cheaper Imports, More Expensive Exports – for us.
For stuff made in China, a weakened yuan is your friend. When the yuan falls in value, goods imported from China become cheaper. And China makes a lot of things from cars and computers to clothing and furniture. Conversely, businesses will find it more expensive to sell their goods to China.
- China is a huge market for both technology and luxury brands. The slowdown in China was already a worry. A devalued currency will cut further into their earnings.
- Companies that make chips for mobile phones do a lot of their business — sometimes most of it — in China.
- For some tech companies like Apple the effects are two way. It manufactures its phones in China, so presumably it will be able to buy its hardware for a lower price. However, Apple sells iPhones in China too, and the currency move makes iPhones more expensive to ordinary Chinese consumers. Investors took the news as an overall negative.
- Companies that sell raw materials in China sank. China has been a big customer for companies that mine iron ore, copper and aluminum, among other metals. The fear is that a weaker yuan will drive up the cost of raw materials at a time when demand is already depressed.
- For companies that purchase most of their goods from China, such as Walmart, their cost of doing business could go down, and therefore those savings would be passed on to the consumer.
Lower Interest Rates
The Federal Reserve is poised to raise historically low interest rates as employment returns to healthier levels. A stronger dollar against the yuan could depress inflation because Chinese goods are cheaper.
- The Fed could hold off on upping rates this fall because it already is worried about inflation being too low.
- Those with mortgages rates, or looking to buy a home, explicitly tied to base rate moves would benefit.
- Income investors and savers looking for more interest — not as much.
China, consumes a lot of oil, second only to the U.S. However, oil prices are denominated in dollars, so a devalued yuan means China’s purchasing power is reduced, which could prompt the Chinese to spend less on oil-based products.
- That reduction in demand could lower prices, an upside for American drivers.
- For stocks and investors who follow the price of oil, the price is going down.
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