Think Tank Proposes Another One-Off Devaluation of The Chinese Yuan

China’s economy is of great concern to financial experts all over the world right now. With the economic growth expected to slow in 2017, and the yuan devaluing further, things can get dicey fast. But a think tank feels the devaluation process is necessary to stabilize the yuan moving forward.

Chinese Economy In 2017 And Beyond

It is always difficult to predict what the Chinese economy will go through in the next 12 months and beyond. It seems safe to say the yuan will continue to devalue in the coming months, although that is not necessarily a bad thing. Or that is what a government-run think tank stated earlier today.

To be more precise, the think tank feels the Chinese yuan needs a thorough one-time devaluation to stabilize the currency. A rather unusual statement, but one that is not entirely unexpected either. The People’s Bank of China has been weakening the yuan on purpose for most of 2016, and they claim this process is necessary to provide future stability.

The same think tank also projects China’s economic growth will slow down to 6.5% in 2017, which is down from 6.7% in 2016. While industrial output will still grow in 2017, its expected numbers are slightly lower compared to 2016 in terms of growth rate. To put this into perspective, China will continue to go through tough times in 2017, even though things have marginally improved.

But the biggest concern remains the yuan and its current market value. A one-off devaluation would send shockwaves through the global economy, but it could be the best option to provide CNY stability in the future. However, it is unclear what price level should be sustained if this devaluation were to happen. It is evident the Chinese government would prefer to keep it afloat artificially once this process has been completed, though.

It would not be the first time the Chinese yuan goes through a one-time devaluation either. In August of 2015, a similar event took place, cutting the value by 2% overnight. Unfortunately, that action did not prevent the currency from losing another 7% of its value in 2016. In fact, it only pushed the capital outflows to new highs, and there seems to be no solution to stem the flow.

Another topic of substantial debate is whether or not China should continue to hoard foreign exchange reserves. Some experts feel the government sees these reserves as “gold,” rather than use them to stabilize the economy right now. Easier said than done, though, as China’s reserves were at its lowest point in six years as of November 2016 already.

In the end, it is important to keep in mind these projected economic growth numbers may not represent the real story. Analysts have voiced concerns over how the official data tends to make things look far better than they are in reality. Moreover, the growing demand for Bitcoin in the country seems to indicate things are not looking very positive right now.

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