On Tuesday, August 11, 2015, China caused quite a stir in the global market by devaluing its currency, the Yuan, in what became the biggest one-day slump in 10 years.
Some commentators suggested that China intentionally created an imbalance in the export industry, to give Chinese manufacturers and exporters an advantage over foreign competitors. The country, which is currently the #1 exporter of goods in the world, has been accused of currency manipulation for trade advantages in the past. However, the Central Bank of China claims that the controlled devaluation is actually in response to balancing its exchange rate system to be more market-oriented, something that has been pushed by the U.S. government for years.
Over the last few months, the Yuan has grown in strength alongside the dollar. This has reduced the competitive edge of Chinese exporters resulting in an 8.3 percent drop in profit margins compared to a year ago.
The Chinese government stated that Tuesday’s devaluation was a one-time event, but, as of Thursday, the Central Bank of China dropped the Yuan for the third consecutive day.
It is no secret that China is gunning to join the ranks of the Dollar, Euro and Yen as an official reserve currency which would require the Yuan to remain strong; but to maintain their advantage in the export market they would have to weaken the Yuan, which may be the tactic they are employing now.
The global market can only speculate on what the second biggest economy in the world is up to but one thing is clear: they are making governments, businesses and investors worldwide very nervous.
Klueger & Stein, LLP works with many clients that manufacture in China or use Chinese vendors. We continue to advise our clients on the best international business and tax strategies to apply in this situation.