The Real Reasons Why China Devalued
The most shocking thing about the world's reaction to China's decision to devalue the yuan was that anyone should have been surprised. For those who have watched China's deteriorating economic growth since late 2014 and the ineffectiveness of monetary easing by the People's Bank of China, the country's central bank, currency devaluation appeared to be not only logical, but also inevitable.
Since recording its last double-digit rate of 10.4% in 2010, China's economic growth has slowed by 3 percentage points over four years to 7.4% in 2014. In response, Chinese policymakers injected massive amounts of credit into the economy. Although estimates vary, total credit growth from 2011 to 2014 probably equaled 100% of Chinese gross domestic product, raising the debt-to-GDP ratio to around 280% at the end of 2014, according to McKinsey, the business consultancy.
Undeterred by the prospect of creating a financial crisis, the Chinese government continued to double down on monetary easing. Since last November, the PBOC has cut interest rates four times by a total of 115 basis points and lowered the reserve ratio (the amount of cash banks are required to hold) three times by 150 basis points...