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So trying to parse this out as a non-economist: - first order effect: Yuan gets cheaper, meaning non-Chinese can buy more Yuan per dollar or unit of their curr

So trying to parse this out as a non-economist: - first order effect: Yuan gets cheaper, meaning non-Chinese can buy more Yuan per dollar or unit of their currency - second order effect: non-Chinese can buy more units of Chinese goods, making Chinese exports more competitive. - second order effect: Chinese can buy less non-chinese goods per Yuan, weakening the ability of China to import items, but potentially strengthening the domestic market. I imagine this will also create some amount of inflation. An interesting technicality is that Chinese currency trades in two separate, mainly correlated markets. The onshore market (CNY) is regulated in a very tight band by the central bank, the offshore market (CNH) is much less controlled and trades in Hong Kong. See https://www.google.com/search?q=cny+vs+cnh https://www.google.com/search?q=cny+vs+cnh for the linkage.

mc32 7y ago
It also counters the import tariff tax lessening the price increase on consumers who seem to be the main constituency of pundits.
- sokoloff 7y ago
  Which plays towards the “and China is going to pay for it” rhetoric.
  - zaroth 7y ago
    The cost of tariffs is always split between suppliers and consumers, roughly in proportion to the elasticity of demand.
    - rrss 7y ago
      I agree that that is typically true, but in the particular case of the 2018 tariffs on China, the cost pretty much fell entirely on consumers. > Overall, using standard economic methods, we find that the full incidence of the tariff falls on domestic consumers, with a reduction in U.S. real income of $1.4 billion per month by the end of 2018 > We find that the U.S. tariffs were almost completely passed through into U.S. domestic prices https://www.nber.org/papers/w25672.pdf https://www.nber.org/papers/w25672.pdf
      - zaroth 7y ago
        Thanks for the link! It looks like initially the price spikes by pretty much the tariff rate, and then over the following months returns back in line with the long term trend line. This makes sense because we also see a significant reduction in import volume from of the goods being taxed, so it implies producers are finding alternate suppliers to avoid the China-specific tariffs at close to the China-supplier price.
    - csomar 7y ago
      > The cost of tariffs is always split between suppliers and consumers, roughly in proportion to the elasticity of demand. The trick is there. It's possible to have China paying for all the tariffs or the other way around. It's probably going to be more complex though: Different products, currency fluctuations and possible rise of other markets.
  - fspeech 7y ago
    Yeah, but it also knocks down oil and other commodity prices that constitute a large portion of Chinese imports.
JumpCrisscross 7y ago
> second order effect The main negative effect is capital flight. If the yuan is devalued, ceteris paribus, an investor holding yuan would prefer to hold anything else. For example, "in 2015, China ...[devalued] the yuan 2%...[and had to burn] through $1 trillion in foreign exchange reserves to steady it" [1][2]. This time might be different, given China's tightened capital controls. But never underestimate peoples' creativity when it comes to moving their money. [1] https://uk.reuters.com/article/uk-china-markets/china-lets-yuan-break-key-7-level-for-first-time-in-decade-as-trade-war-worsens-idUKKCN1UV06A https://uk.reuters.com/article/uk-china-markets/china-lets-y... [3] https://www.bloomberg.com/news/articles/2016-01-25/china-capital-outflows-climb-to-estimated-1-trillion-in-2015 https://www.bloomberg.com/news/articles/2016-01-25/china-cap...
- rahimnathwani 7y ago
  "If the yuan is devalued, ceteris paribus, an investor holding yuan would prefer to hold anything else." If you didn't sell your CNY at yesterday's price, why would you want to sell at today's (lower) price?
  - JumpCrisscross 7y ago
    > If you didn't sell your CNY at yesterday's price, why would you want to sell at today's (lower) price? Minorly, because tomorrow's price might be lower. Majorly, because even taking into account the price drop, the present value of the currency-swapped yield on investments in a foreign currency are greater than those prospects at home.
    - rahimnathwani 7y ago
      The first point violates your explicit 'ceteris paribus' assumption. A devaluation today doesn't on its own provide information about future moves. I don't understand your second point. Perhaps you could give a simple illustration?
      - megous 7y ago

mc32 7y ago

It also counters the import tariff tax lessening the price increase on consumers who seem to be the main constituency of pundits.

sokoloff 7y ago
Which plays towards the “and China is going to pay for it” rhetoric.
- zaroth 7y ago
  The cost of tariffs is always split between suppliers and consumers, roughly in proportion to the elasticity of demand.
  - rrss 7y ago
    I agree that that is typically true, but in the particular case of the 2018 tariffs on China, the cost pretty much fell entirely on consumers. > Overall, using standard economic methods, we find that the full incidence of the tariff falls on domestic consumers, with a reduction in U.S. real income of $1.4 billion per month by the end of 2018 > We find that the U.S. tariffs were almost completely passed through into U.S. domestic prices https://www.nber.org/papers/w25672.pdf https://www.nber.org/papers/w25672.pdf
    - zaroth 7y ago
      Thanks for the link! It looks like initially the price spikes by pretty much the tariff rate, and then over the following months returns back in line with the long term trend line. This makes sense because we also see a significant reduction in import volume from of the goods being taxed, so it implies producers are finding alternate suppliers to avoid the China-specific tariffs at close to the China-supplier price.
  - csomar 7y ago
    > The cost of tariffs is always split between suppliers and consumers, roughly in proportion to the elasticity of demand. The trick is there. It's possible to have China paying for all the tariffs or the other way around. It's probably going to be more complex though: Different products, currency fluctuations and possible rise of other markets.
- fspeech 7y ago
  Yeah, but it also knocks down oil and other commodity prices that constitute a large portion of Chinese imports.

JumpCrisscross 7y ago

> second order effect The main negative effect is capital flight. If the yuan is devalued, ceteris paribus, an investor holding yuan would prefer to hold anything else. For example, "in 2015, China ...[devalued] the yuan 2%...[and had to burn] through $1 trillion in foreign exchange reserves to steady it" [1][2]. This time might be different, given China's tightened capital controls. But never underestimate peoples' creativity when it comes to moving their money. [1] https://uk.reuters.com/article/uk-china-markets/china-lets-yuan-break-key-7-level-for-first-time-in-decade-as-trade-war-worsens-idUKKCN1UV06A https://uk.reuters.com/article/uk-china-markets/china-lets-y... [3] https://www.bloomberg.com/news/articles/2016-01-25/china-capital-outflows-climb-to-estimated-1-trillion-in-2015 https://www.bloomberg.com/news/articles/2016-01-25/china-cap...

rahimnathwani 7y ago
"If the yuan is devalued, ceteris paribus, an investor holding yuan would prefer to hold anything else." If you didn't sell your CNY at yesterday's price, why would you want to sell at today's (lower) price?
- JumpCrisscross 7y ago
  > If you didn't sell your CNY at yesterday's price, why would you want to sell at today's (lower) price? Minorly, because tomorrow's price might be lower. Majorly, because even taking into account the price drop, the present value of the currency-swapped yield on investments in a foreign currency are greater than those prospects at home.
  - rahimnathwani 7y ago
    The first point violates your explicit 'ceteris paribus' assumption. A devaluation today doesn't on its own provide information about future moves. I don't understand your second point. Perhaps you could give a simple illustration?
    - megous 7y ago