Impacts of CNY devaluation on China and global economy

If the devaluation implies a changed currency policy from Beijing and a prolonged CNY weakness, it would be bad news for the world economy. China is the world's largest exporting nation and adopting a beggar-thy-neighbour policy would aggravate the competitive devaluation scheme. 

Already today, most Asian currencies have weakened on the news and especially the higher-end exporters like South Korea, Taiwan and Singapore. As China has been climbing the value chain, it has become a large competitor to these countries. At the same time, some of the labour-intensive sectors remain in China and accounting for at least 15% of total exports, the Chinese devaluation also poses a risk to economies like Thailand and Vietnam.

"The impacts on the Chinese economy are expected to be positive but not as big as it would be 10 years ago. The Chinese economy has become much less export-dependent since the Lehman crisis, so a weaker currency can only help to a limited extent", says Nordea Bank. 

Besides, China's competitiveness remains soft as the trade-weighted CNY is still stronger than most other currencies. We expect Beijing to launch more stimulating policies in H2, including one more rate cut of 25bp and RRR cuts of totally 100bp. 

"Even with all the favourable policies, the economy faces strong headwinds from structural challenges such as overcapacity and stubborn PPI deflation that erodes corporate profitability. The growth target of 7% is expected to be missed this year. Our new growth forecast will be released in our Economic Outlook on 2 September", added Nordea Bank.