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The World Price Index

Released: September 15, 2015

China’s Yuan devaluation adds further pressure on BRICS

  • WPI data and Producer Price Index show that Chinese deflation started in July 2014
  • Russian Rouble and Brazilian Real fall to lower valuations against US Dollar
  • Indian Rupee remains undervalued at -35.5%

Chinese Yuan 17% undervalued
The latest set of World Price Index (WPI) data for September indicates that the Yuan fell to an undervaluation of 17.1% against the US Dollar measured in terms of Purchasing Power Parity (PPP). In September, the market foreign exchange rate stood at US$1 to Yuan 6.37, compared to a WPI rate of US$1 to Yuan 5.28 which actually showed a slight appreciation in the purchasing power of the Chinese currency from Yuan 5.30 in August.

The Chinese authorities effected a devaluation of the market value of the Yuan last month through a change in the way the central bank intervenes in foreign exchange markets. The reference rate for the Yuan to Dollar exchange was set 1.86% lower on the 10 August, the currency was then pushed down further by traders. This sparked off accusations of currency manipulation suggesting that China was trying to stimulate flagging exports and led to ripples of instability in world financial markets. The data from the WPI and the Chinese official Producer Price Index arguably an index less subject to political manipulation than the Consumer Price Index, shows that the fundamental causes behind the devaluation were revealed as early as July 2014. The rapid slowing of the Chinese economy has resulted in severe deflationary pressures and the devaluation indicates that the rate of GDP expansion could be well below official Chinese forecasts now reduced from 7.4% per annum to 7.3%. This conclusion is also indicated by the latest data from World Economics China Sales Managers’ Index for August which has shown a consistent rate of decline in the growth of company’s sales and falling factory-gate prices. The stability of the Chinese Yuan which tried to shadow the US Dollar was once the mortar that held the BRICs together but with China facing severe internal and external imbalances it has joined Russia and Brazil in unstable territory.

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