Renminbi reform will not allay suspicions

Significance

Beijing's abrupt reform of its exchange rate regime on August 11 led to an immediate sharp devaluation, but is also broadly consistent with giving market forces a greater role in determining the value of the currency.

Impacts

• The devaluation will have limited impact on the competitiveness of China's exports.
• Efforts to manage the exchange rate will prove increasingly costly and will be viewed negatively on market-based criteria.
• An increase in China's trade surplus will result in further accumulation of foreign exchange reserves.
• The cost of funding for firms and greater access to credit will be pressing policy concerns as the economy growth slows.