Making sense of china’s currency move

Mohamed El-Erian: Yesterday China openly devalued its currency to boost its economy. With this move, China explicitly joins other nations trying to capture economic activity outside their borders, and it is doing so as the global economy is struggling to generate sufficient growth. The longer countries fail to deliver domestically driven growth, the more they will be tempted to “steal” it from others. A way of trying to do so is to devalue a national currency in an attempt to make exports more competitive and imports more expensive. But what may work for individual countries cannot work for the system as a whole; and that has implications for financial markets. China’s decision must be a consideration in the Federal Reserve’s intense deliberations on when to start its interest rate hiking cycle. In time, China’s currency move will be viewed as an important step in the country’s multiyear journey toward a more efficient and responsive market-determined system. Short term, it will amplify the challenges to global growth, and add volatility to markets that have lost some of their fundamental anchoring. (VIEW LINK)