Tahoe-Truckee Market Beat: Devaluation of the Chinese yuan | SierraSun.com

Tahoe-Truckee Market Beat: Devaluation of the Chinese yuan

Ken Roberts
Special to the Sun

Stock markets were spooked recently by news that the Chinese economy is slowing and that they had decided to devalue their currency, the yuan.

China is the world’s number two economy with a GDP of about $11.2 trillion dollars. By comparison, the GDP of the United States, the globe’s number one economic power, is about $18.1 trillion dollars.

Other leading countries lag far behind the US and China in terms of GDP. Japan is the world’s third largest economy with a GDP of about $4.2 trillion, followed by Germany and the United Kingdom with GDPs of $3.4 trillion and $2.9 trillion respectively.

The Chinese have decided to devalue their currency to make their exports more affordable and help stimulate their economy.

The Chinese economy is still growing at a decent clip, just slowing from the unsustainable levels of the last few years.

In 2010, their economy grew at 10.5 percent and in 2011 at 9.3 percent, since then it has slowed down to about a 7 percent rate of growth, which is still a respectable growth rate.

By comparison, the most recently revised US GDP growth rate for the second quarter came in at 3.7 percent.

The most liquid of the China based ETFs, FXI, which is the China large cap ETF is down about -12.19% YTD.

Most of that drop has occurred in the last four weeks as it has fallen over -10 percent in the last month. Over the last three years it has averaged an annual return of 15.85 percent and just 1.85 percent over the last five-year period.

August is shaping up to be the worst month for US markets since 2010 or 2011 depending on which index you’re looking at.

At the time of this writing this could be the worst month for the Dow since May 2010 and the worst month for the S&P 500 since September 2011.

It will be interesting to see what, if any, further measures China will take to shore up its economy and how global markets will react to their policy adjustments.

For the time being, the US economy is plugging along at a pretty good rate, and all eyes are on the Federal Reserve for a change in interest rates.

Kenneth Roberts is a Truckee-based Registered Investment Advisor. Information is at his blog at http://www.sellacalloption.com or 775-657-8065. The mention of securities should not be considered an offer to sell or solicitation to buy investments mentioned. Consult your investment professional to understand the risks and/or how the purchase or sale of these investments may be implemented to meet your investment goals. Past performance is no guarantee of future results.