China currency devaluation “is not competitive”

12 Aug 15

China’s surprise move to devalue its yuan is not the start of a currency war or an attempt to jump-start economic growth, “it is more structural reform”, Standard & Poor’s rating service said today. 

S&P said China’s decision to allow for more exchange rate flexibility made “good economic sense”.

In its report, China’s new exchange rate regime is more structural reform than competitive devaluation, S&P said the move was more likely down to a relatively benign “technical correction”.

The agency suspects that the move will improve market functioning. It also said it could be because China is attempting to comply with International Monetary Fund conditions so it is included in the fund’s basket of reserve currencies, known as special drawing rights (SDR).

“The argument that China is trying to spur growth by weakening its currency … does not strike us as very convincing,” said S&P’s chief economist for Asia-Pacific Paul Gruenwald.

In a separate statement, the IMF welcomed China’s move to devalue its currency, confirming that it would have an impact in gaining SDR status with the fund.

The move “appears a welcome step as it should allow market forces to have a greater role in determining the exchange rate,” the IMF said in a release.

“Regarding the ongoing review of the IMF’s SDR basket, the announced change has no direct implications for the criteria used in determining the composition of the basket,” it added. 

  • Judith Ugwumadu
    Judith Ugwumadu

    Judith writes about public finance, public services and economics across Otsubo7 International and Otsubo7. She previously undertook reporting stints at Financial Adviser, Global Security Finance and The Sunday Express.

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