Beijing’s move will slow U.S. inflation and growth Correct me if I’m wrong, but wasn’t the yuan already too cheap? For as long as anyone can remember, the big issue in global trading markets has been how inexpensive goods emanating from China have been. Some of this has to do with wages, some with fewer laws regulating air pollution and so on. But a large portion of the reason why Chinese goods are so cheap stems from the value of its currency in world financial markets. Although most currencies float against the others, not all do. China is one of those countries whose currency does not float. It is tethered to the dollar at a level USDCNY, -0.0875% well below its true worth. In other words, the yuan’s value is tightly managed low by the Chinese government — ostensibly to allow its export sector a chance to grow. As you know, an undervalued currency makes a country’s exports cheap and imports more expensive. This encourages goods made in that country to flow out while restricting the inflow of imported merchandise. Estimates of the amount by which the yuan is undervalued vary, but if the Economist’s Big Mac Index has it right, the yuan could well be undervalued by as much as 43%! And this is before last week’s devaluation. On the other hand, the International Monetary Fund declared in May that it no longer judged the yuan to be undervalued. So why did China devalue an already weak currency? I can think of at least two reasons. The first is that its struggling economy needs a lift, and, as noted above, this move will help exporters. Second, because it is tied to the dollar, the yuan has already risen against the currencies of most of its trading partners and may rise further if and when the Federal Reserve starts raising interest rates. Besides the usual effects on its trading partners, China’s devaluation will have other, less noticed consequences. These currency moves will depress sales of high-end goods in fancy shopping centers, and even real estate, here in the United States. For some time now, wealthy Chinese have been taking money out of China and investing it stateside. It is not unusual to see Chinese bidding up prices of luxury homes in neighborhoods with good schools, offering to pay cash at times. They think nothing of plunking down thousands of dollars to buy designer pocketbooks, clothes and jewelry. However, this urge to splurge is cooling off, now that the yuan is worth less than before, and may head even lower still. Those countries that don’t follow China’s devaluation will experience slower growth and less inflation. This is bad news and good news for a country like ours. The bad news is less growth in an already slow-growth economy risks keeping unemployment from falling further. The good news is that this may very well stay the Federal Reserve’s hand when it comes to boosting interest rates — especially since most other central banks are actually loosening their monetary policies. MarketWatch