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China's yuan devaluation throws oil market pricing into question

The Chinese central bank's move to devalue the yuan is intended to revitalize the country's economy and make China's export goods competitive. This measure, however, has caused concern in the United States, the European Union and the Asia-Pacific region and thrown oil market pricing into question, experts polled by TASS said on Thursday.

China's central bank carried out the yuan's biggest devaluation in the past 20 years during three consecutive days. The Chinese currency was devalued by 1.9% on Tuesday, August 11, by another 1.62% on Wednesday and by 1.1% on Thursday to fall to 6.4 yuans to the US dollar.

China's central bank announced on August 13 that the operation for adjusting the exchange rate of the renminbi (the yuan's official name) was completed as a whole.

China's central bank has devalued the yuan to support national exports, which fell by 8.3% in July 2015 from the same month of the previous year, ex-Governor of Russia's Central Bank and Chairman of the Supervisory Board of VTB Bank Sergei Dubinin said.

"The Chinese economy has been confronted with falling exports. That is why, the People's Bank of China has taken a decision to stimulate export-focused sectors and support import substitution. This measure is beneficial for exporters: they spend yuans on spare parts and components and wage payments to workforce inside the country and earn foreign currency from exports, therefore, getting bigger revenues in yuans," Dubinin told TASS.

"Tight administrative currency export control exists in China. The yuan devaluation is designed to further complicate this process and support the domestic market amid a fall in equity prices and re-channel speculative investors into buying Chinese securities. This measure is intended to intensify an inflow of foreign investment into China's production market," the expert said.

The yuan devaluation has caused concern in the United States and countries of the European Union and the Asia-Pacific region, Dubinin said.

"Western countries and China's neighbors view this move as a currency war that may cause a chain reaction of currency devaluations in the countries that are China's major trading partners. The US believes the yuan was deliberately underrated even before its devaluation, which created export advantages for Chinese goods on external markets. These are no longer fake jeans but cheap and quite technological Chinese goods: electronics, products similar to iPhones and iPads, which people buy willingly. That is why, the US is demanding that the yuan exchange rate be raised," the expert said.

"Under certain conditions, the yuan can become an international reserve currency and there are all the grounds for that. For this purpose, the yuan should become a freely convertible currency. China insists that the International Monetary Fund should include the yuan in the Special Drawing Rights basket and this will already signify the yuan recognition as a reserve currency," Dubinin said.

The yuan devaluation is also exerting direct influence on world oil prices, the expert said.

"The current fall in the prices of oil has also resulted from its reduced consumption by the Chinese economy, the second largest consumer of hydrocarbons after the United States. Further developments will depend on the pace of growth of China's economy, which is demonstrating fairly good results as a whole: the country's GDP grew by 7% in the second quarter on an annual basis. That is why, I don't see any serious grounds for fears of a collapse in oil prices. But Russia should pay attention to the signal that the situation with its balance of payments may deteriorate," the expert said.

Deutsche Bank Chief Economist for Russia Yaroslav Lisovolik also said he didn't rule out that the yuan devaluation might affect the currencies of other countries.

"If the yuan devaluation gives an impulse to the devaluation of other emerging market currencies, this will also lead to the ruble's weakening," Lisovolik told TASS.

"The yuan's weakening may also have its effect on oil prices. If the growth of the Chinese and world economies slows down, the world demand for oil will also decline. But the scope of this problem is not critical so far," the expert said.

[Source: By Tamara Zamyatina, Itar Tass, Moscow, 13Aug15]

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