China has entered the global currency war.
Today it devalued its currency, the yuan, by the most it has in two decades.
The yuan is different from most currencies. The price of currencies like the US dollar, the euro, and the yen all move around like a stock price. The market determines their prices. When investors buy, their price goes up. When investors sell, their price goes down.
The price of the yuan does not move around like a stock price. The Chinese government controls the price of the yuan. So the yuan is worth whatever the Chinese government wants it to be worth.
On Tuesday, the Chinese government decided to make the yuan worth 1.9% less.
The Wall Street Journal called it “the most significant downward adjustment to the yuan since 1994, when as part of a break from Communist state planning, Beijing let the currency fall by one-third.”
• Regular readers know that China has big problems…
The Chinese economy grew at its slowest pace in two decades during the first quarter of the year. And the Chinese stock market crashed 32% in just 17 days earlier this summer.
China is devaluing the yuan to help its economy. Bloomberg explains how the strong yuan has been hurting China’s economy.
A strong yuan had put pressure on China’s exports. The nation’s overseas shipments fell 8.3 percent from a year earlier in dollar terms in July, well below the estimate of a 1.5 percent decline in a Bloomberg survey.
The Chinese government hopes that a weaker yuan will make Chinese exports cheaper… and help jumpstart the Chinese economy.
• The People’s Bank of China promises that it won’t devalue the yuan any more…
But investors don’t believe it, as Bloomberg explains:
The Chinese central bank’s move on Tuesday was a one-time adjustment, it said in a statement, adding that it plans to keep the yuan stable at a ’reasonable’ level and will strengthen the market’s role in determining the fixing.
“They’re saying it’s a one-off, but I don’t think the market’s actually buying that,” said John Gorman, head of US dollar interest-rate trading for Asia and the Pacific at Nomura Holdings Inc. in Tokyo. “This might be the start of a broader change. That’s why the market is reacting so strongly.”
• The world is at war…
But it’s not a shooting war. It’s a financial war.
China is one of the last countries to join this war. Almost all other world governments have been devaluing their currencies for months or years.
Just look at the performance of some of the most important currencies over the last year:
- The Japanese yen is down 18% against the US dollar
- The euro has dropped 18%
- The Australian dollar has dropped 21%
- The Canadian dollar has dropped 17%
- The New Zealand dollar has dropped 22%
These countries’ central banks are devaluing their currencies on purpose. They don’t do it directly, like the Chinese government does with the yuan. They devalue their currencies indirectly by printing money and lowering interest rates.
A weaker currency helps a country’s economy…at least in theory. A weak yen, for example, makes Japanese goods cheaper for buyers in other countries. So the Bank of Japan has weakened the yen to get people in other countries to buy more Japanese stuff.
It sounds like a decent plan…
Except when all countries try to do it at the same time.
And today, pretty much all major countries are trying to devalue their currencies at the same time.
So instead of gaining a competitive advantage, they’re simply destroying their currencies.
• Going Global 2015 is our survival guide for the global currency war…
We wrote Going Global 2015 to show you how to protect yourself and your family from situations just like this.
It’s a 233-page hardcover book full of easy steps for protecting yourself and your family from the effects of the global currency war.
• Media stocks had their worst two days since the financial crisis…
US stocks have been in a huge bull market. Since bottoming in March 2009, the S&P 500 has risen 211%.
Bloomberg explains how media stocks were a major driver of this rally…until now.
More than technology or even biotech, media stocks have ruled the roost during the share advance that restored $17 trillion to American equity prices since the financial crisis. Companies from CBS Corp. to Tegna Inc. and Time Warner Cable Inc. are among stocks with the 60 biggest increases during the stretch…
Until Tuesday, media shares were the best-performing shares of the bull market, rising 531 percent to eclipse automakers, retail stores and banks. The industry’s market capitalization was about $650 billion, compared with $135 billion in March 2009.
Bloomberg notes “until Tuesday” because media stocks tanked last week.
The S&P 500 Media Industry Group Index tracks 15 major media stocks. It tracks stocks like cable and film company Time Warner Cable (TWC) and entertainment giant Walt Disney Company(DIS).
Last week, the index fell 8.2% in two days…its worst two consecutive days since November 2008.
The sell-off started when Disney reported bad second-quarter results. The company said its operating income will likely fall $500 million short of original expectations. Disney’s share price plunged 8.4% on the news.
Viacom Inc.(VIA.B), which owns Comedy Central and MTV, was next to report bad news. Its revenues dropped 11% from last quarter. Its stock lost 20% last week.
Before last week, media stocks had gained 8.5% this year. Now they’re up just 1.4%…less than the S&P 500’s 2.2% gain in the same time.
Chart of the Day
Today’s chart shows the yuan’s 1.9% one-day drop vs. the US dollar.
That might not sound like a huge drop. But it’s significant because it was the yuan’s biggest drop vs. the dollar in more than twenty years. And as you can see from the chart, it’s a huge move compared to how little the yuan usually moves against the dollar.
The yuan is now at a three-year low against the dollar.
Delray Beach, Florida
August 11, 2015