Stocks around the world continued to lose value, over $5 trillion in value has been lost in the last 2 weeks, as investors continue to flee riskier assets after China’s currency devaluation.
The move, which many have claimed was a move designed to boost exports, has caused waves all around the world. Investment to developing countries has been especially hard hit, with Kasakhstan the first country to experience rapid inflation in its wake.
So what happened?
China devalued its currency; meaning it lowered its exchange rate compared to other countries, by over 6% in a span of a few days. From an import-export perspective, 1 US dollar now buys 6% more Chinese goods as previously, while US goods are now 6% more expensive to import to China. At this level, it works to boost Chinese exports and deter imports from other countries.
From an investor’s perspective, things look a bit different. Investors all over the world buy stocks, invest in companies, and do business in China, usually with their investments denominated in the Chinese Yuan. This means an investor from London converted his British Pounds to Yuan, and used that to buy stocks on the Shanghai Stock Exchange. From this investor’s perspective, when he eventually sells his shares, he will convert it back into Pounds.
When the exchange rate suddenly drops, it means that his investment is now worth less by exactly that amount; all of his investments in China would have just lost 6% of their value overnight. For the trillions of Dollars, Pounds, Euros, Yen, and Yuan invested from all over the world, this is a substancial loss.
This means that investors who lost value with the currency devaluation now are acting a lot more conservatively, pulling their money out of “risky” investments, and countries with less stable currencies, to try to find something more stable, like bonds. Currency traders are doing the same; trying to move all their assets out of riskier currencies. This is causing a domino effect; countries that were previously not involved, but which may have strong trading ties with China and so depend on exports to China (like Kazakhstan, which exports raw materials to China) are also getting hit both by investors pulling money out, fewer exports to China, and currency traders betting against them all at once. As more countries start to feel the sting, the panic begins to spiral outwards.
The market is still looking for a bottom, but until prices begin to stabilize, be ready for some volatility in your portfolio!
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