China devalues RMB but still at risk of hard landing

Greece and its international lenders reached an 85 billion euro bailout agreement on Tuesday.

However, markets on Tuesday were mostly focused on China's RMB devaluation, which saw the People's Bank of China push its daily fix against the US dollar to 6.2298 from 6.1162 the day before. This lowered the value of the RMB by 1.9 per cent, its biggest one-day change since 1993.

It followed up the move with another 1.6 percent devaluation on Wednesday.

The devaluation comes just days after China reported that its exports fell 8.9 percent in July from a year earlier.

The devaluation jolted global markets on Tuesday. The S&P 500 fell 1.0 percent while the STOXX Europe 600 fell 1.6 percent. Oil and metals prices also fell sharply and bond yields declined in the US and Europe.

While markets appear to have been caught off-guard by the move, Francis Coppola thinks that the devaluation had become almost inevitable.

In an article for Forbes, Coppola wrote that there has been a growing divergence between the RMB’s “central parity” and the RMB’s market rate. Maintaining a higher parity than the market wants is costly and has forced China to unload its foreign reserves “at a rate of knots” to support its currency.

Furthermore, with July's “dismal” export figures, Coppola thinks that China has actually been too slow to devalue and that this may prove costly. “Even with this devaluation, and probably more to come, China is set for a very hard landing”, she wrote.

And to Coppola, this in turn means that Fed interest rate rises look unlikely. “Raising interest rates when the dollar is strong, the economy weak and China on the verge of a nasty crash would be unbelievably foolish”, she wrote.