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The Chinese yuan experienced the largest one-day fall in value yesterday since 1994, trading at 6.22 yuan per dollar, the lowest point in almost three years.
The Chinese government has stated that this decline is a response to “free market pressures” and is simply allowing the market to influence their currency valuation. To note, the U.S. dollar has appreciated approximately 20% against the euro this year. Historically, the yuan’s value has been set using a moving band around a middle price set by the Central Bank. The recent downward shift in yuan valuation signaled that Beijing is worried about slowing economic growth and is attempting to boost exports. In theory, a shift towards a weaker currency will increase exports and boost economic growth.
The devaluation of the yuan is the most recent of many moves by the Chinese government to boost their economy. Beijing has already accelerated a large number of infrastructure projects to boost demand internally and has lowered the cash reserve requirement for their financial institutions. The three major changes to Chinese economic policy arrived approximately four months apart, with the news of acceleration of infrastructure projects headlining in January of this year, reserve requirements during April, and the devaluation of the yuan in August. The global impact of these three policy changes has also escalated every four months, beginning with infrastructure projects that boost domestic demand, and ending with global devaluation which makes Chinese exports more attractive at the expense of national purchasing power.
International capital has been flowing away from China and has recently hit a 10-year low. Investment flows moving away from the Chinese economy signal economic weakness and a belief that the Chinese economy is slowing down. By increasing the amount of yuan that can be bought per dollar, Beijing is signaling its willingness to take drastic measures to ensure that the Chinese economy is still attractive to foreign investment and maintains its competitive advantage in the region. As a final note, the devaluation of the yuan could negatively impact global commodities prices.
The following is a sampling of S&P 500 companies affected by the devaluation:
Apple (AAPL )
Apple manufactures their products in China, and 16% of Apple’s revenue comes from the region.
Dividend Yield: 1.83%
Daily Change: (- 5.2%) to $113.49
Yum Brands ˙(YUM )
A worldwide leader in China and other emerging markets. 52% of Yum Brands’ sales are from China.
Dividend Yield: 1.96%
Daily Change: (-4.87%) to $83.54
Texas Instruments Inc. Liquid error: internal
32% of Texas Instrument’s sales originate from China. That’s a lot of calculators.
Dividend Yield: 1.56%
Daily Change: (-2.76%) to $50.64
Lately, China has been one of the center points of economic news, with developments in that nation significantly impacting the global economy. Dividend.com will continue to follow the developments of that nation, examining potential impacts on investors.
Image courtesy of Keattikorn at FreeDigitalPhotos.net