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China’s devaluation of the yuan

China devalued its tightly controlled currency on Tuesday, causing the Yuan’s biggest one-day decline in over a decade. The rather unexpected move of China’s central bank was aimed to give more confidence to investors and move the country’s stagnant economy. China not only experienced a huge slowdown of investments and infrastructure spending, its stocks encountered a fairly big drop over the past two weeks.

Last Friday, The Shanghai Composite Index experienced an astonishing 7.4% downturn, which means their largest one-day decline since 2008. On the other hand, the yuan is might be joining the SDR in two months, where a vote by the current IMF board members will determine whether it should be added to the international currency basket. Since October 2013 the yuan has gained nearly 14% average against other currencies.

As for the other countries, a weaker yuan could hurt the competitiveness of foreign firms pretty badly by making their goods and services relatively more expensive, which could actually mark the next chapter in currency wars. Most Asian markets fell and currencies generally sank, as Japan’s Nikkei 225 index fell 0.4% and The Shanghai Composite Index ended flat. Commodity prices, which are sensitive to Chinese demand, were badly affected. Brent crude oil was down 2.4% at $46.16 a barrel.

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