THE YUAN IN PERSPECTIVE: THE PATH TO A NEW GLOBAL CURRENCY AND NOT A CURRENCY WAR.

THE YUAN IN PERSPECTIVE: THE PATH TO A NEW GLOBAL CURRENCY AND NOT A CURRENCY WAR.

Chinese currency Yuan has lost 1.8 percent on Tuesday, losing 1.6 percent Wednesday. This exchange rate movement  is considered as being the highest daily rate movement since 1994. This movement involves more than a devaluation; it is likely that it is an effort to open the door to  the floating exchange rate regime, that is the "world currency".

The reason why the world had raised the eyebrows when saying "China launches currency war",  was the appreciation process that had continued for a long time; did China change its decision?
Did China support the idea of providing a stimulus to its exports and growth through devaluation which has seen its export fall by 8.3% in July compared to the previous year, its economic growth shrinking to the lowest on the last 10 years to the figure of 7.4%?

This step is a strong probability; it suggests that China's strict foreign exchange regime, which magnifies the wave of reforms in recent years, is approaching the brink of leaving the Yuan to fluctuate in free market conditions. In the medium term; she will increasingly open the currency band and will allow the establishment of the value of money in market conditions.

Yuan did not reflect the country's economic equilibriums for a long time; China's government, even though the country has a surplus of foreign trade, made an effort to keep the money worthless. Despite its huge trade surplus against the US dollar in nominal terms during the period from 1995-2005 the money was kept constant at 8:27. During the 2005-2008 crisis, under the pressure of the US administration with the blame of currency manipulator, she has permitted a controlled appreciation of its currency. Yuan, which approached 6.82 by the end of 2008, stayed there until May 2010. After June 2010, its resumeD its appreciation process; it appreciated up to 6.05 by the end of 2013.  With the wave of reforms at the end of 2013, from the beginning of 2014, it was observed that she allowed a loss of value in its currency from time to time. It closed at 6.21 on Monday against the dollar, it dropped to 6.44 with the depreciation that occurred on Tuesday and Wednesday.

The Bank of China set a mid-point in its currency rate on a daily basis and allows the currency rate to fluctuate up and down by 2 percent. When the midpoint shifts, than the currency rate fluctuates in the band that was set up around the centre. The following day's currency rate which is determined according to the previous day's official currency rate (mid-point), the Bank of China has declared on Tuesday that it will be determined according to the "previous day's market closing". This has created a currency bounce, of course, but it will result in the currency rate being determined by the market conditions.

The Bank of China will probably expand this band which is determined now by the market conditions and Yuan will reach its value under the market conditions without intervention. The currency rate will thus drop or rise.

As China approaches the free exchange rate regime and also removes the currency exchange controls, Yuan will start to become an international currency. In this regard, this development which is seen as a devaluation, must be an important gateway to the convertibility transition of China. The allowance given to such a currency move in China has been described as a devaluation; it was an unprecedented overnight high loss of value.

This exchange rate movement in China, triggered the depreciation in neighbouring countries. The currencies of the giant countries such as Malaysia, Korea and Indonesia have lost roughly 2.5 percent. But China's impact will gradually decrease. Bank of China's intervention which happened yesterday and where she intervened by selling against the depreciation of the Yuan, reveals that the Chinese government's aim by changing the system determining the exchange rate does not carry the intention of devaluation. As this becomes clear, the reflections upon other countries will disappear.

Ultimately on Tuesday, China has opened the window  of a new global currency...