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Where Does The US-Chinese Turmoil Leave Europe?

Where Does The US-Chinese Turmoil Leave Europe? by Dan Steinbock, Difference Group

About a week before last Friday, the People’s Bank of China (PBoC) adjusted the exchange-rate of the Chinese yuan against the US dollar to better reflect market conditions. The net effect was a devaluation of 1.9 percent relative to the dollar.

Critics saw the PBoC’s adjustment as still another signal that the slowdown of Chinese growth is worse than anticipated.

However, that slowdown simply reflects the shift of China’s growth model from investment and exports to consumption and innovation. This shift will take another decade.

Others argued that China’s devaluation was the opening shot in a “currency war” that would spread internationally. In reality, jumpstarting exports and growth tends to require a devaluation of 10-20 percent to be truly meaningful. In that regard, China’s 2 percent devaluation is grossly inadequate.

Still others saw China’s exchange-rate adjustment as an effort to comply with the requirements of the International Monetary Fund (IMF) to include the yuan in the major reserve currency basket.

Indeed, the move toward a more market-determined rate is precisely what the IMF and the US Treasury, along with European financial authorities, have been asking for.

US correction was expected

For some time, Wall Street has anticipated market correction. After all, market valuations no longer reflect fundamental economic realities.

Markets have shrugged off even international signals, including the plunge of energy prices, stagnation in Europe and Japan, growth slowdown in emerging economies, the...


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