Eratic PBoC Signals China’s Lurch Back to Old Growth Mode

The devaluation of the yuan could be justified by the strong trend of the US dollar.

If we look at a one-year figure, the US dollar has significantly appreciated against the euro and pound, but since the PBoC has previously been maintaining the exchange rate of yuan to US dollar, the yuan was relatively too expensive compared to the euro and pound.

Now since the Eurozone and UK are also very important trade partners of China, and China is facing diminishing export numbers in July, the devaluation could be justified.

But the devaluation of today and yesterday does have two implications.

The first is that, for foreign investors, policy risk is still the major risk of investing in China, which is very difficult to manage.

Though the devaluation itself should be no surprise, the aggressive and unpredictable way that the PBoC is implementing it in is a huge shock to international investors.

It will dampen the confidence of investors in holding yuan, and effect the process of the internationalisation of the renminbi.

Second, it shows that the Chinese government is not giving up on export revenue when it is making its 13th five-year plan.

Though it is not a good long-term solution for the country's slowing growth, to reach a good nominal GDP growth number for 2015 the Chinese government appears to be switching back to its old growth mode.

Other emerging countries will feel the pressure.