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News Tip: China’s 4% Depreciation ‘Could Impact Fed Hike Timing,’ Expert Says

China is gradually allowing market forces to impact currency rates while grappling with its slowing economy

China is gradually allowing market forces to impact currency rates while grappling with its slowing economy. This means the U.S. dollar appreciates, hurting prospects for U.S. exporters.

• Quotes: "The People’s Bank of China is trying to avoid a hard landing for the Chinese economy. However, a relatively minor depreciation, 4 percent, is unlikely to have much impact on growth,” says Campbell Harvey, a professor specializing in financial markets and global risk management at Duke University’s Fuqua School of Business.

“Many of the government statistics are of dubious value. The GDP growth numbers are widely discounted. We do know that exports have fallen and inventories have risen. These are bad omens for future growth and, in part, provide the mercantilist motivation for the devaluation.”

“Yes, this is the largest devaluation since 1994, 4 percent. However, it is small compared to 1994. In 1994, the currency depreciated by one third!”

“There is another important force going on. One of China’s longer-term goals is to become a reserve currency. They have been taking small steps toward that goal. They want to be included in the IMF’s Special Drawing Rights (SDR) basket. To do that, they need to show that their currency is driven mainly by market forces rather than government controls. To me, they are far from achieving that goal. Even with this devaluation, the float is perceived as very dirty.”

“The timing of the devaluation is no surprise. We have the backdrop of slower growth and the stock market bubble being pricked. In addition, it’s best to get this over in the dog days of summer -- before President Xi Jinping’s trip to Washington in September.”

“If this devaluation persists and becomes more substantial, it could impact the Fed’s anticipated September rate hike. This hike will make the U.S. dollar even more attractive to investors and lead to further dollar appreciation with our trading partners. This makes our exports less competitive and hurts U.S. economic growth.”

“A hard landing in China, no growth in the Eurozone, Japan in a 20-year stasis, and trouble in emerging markets like Brazil does not bode well for future U.S. growth -- devaluation or no devaluation of the yuan.”

• Bio:Campbell Harvey is a business professor specializing in financial markets and global risk management at Duke's Fuqua School of Business. http://www.fuqua.duke.edu/faculty_research/faculty_directory/harvey/

•   For additional comment, contact Professor Harvey at: cam.harvey@duke.edu