Last week, China unexpectedly devalued its currency, representing the largest yuan depreciation for 20 years. Financial analysts have announced that this is bad news for the rand, and for the mining resource sector. And the problem is likely to get worse.

The once-off currency devaluations are the first since the yuan was pegged to the US dollar in 1994 raising questions over the severity of China’s economic slowdown. The currency devaluation will help reflate China’s economy, but at the same time will export deflation to the rest of the world. The yuan devaluation will cause commodity prices, which have already suffered sharp declines since the start of the year, to fall even further.

Basically, as fin24 explains:

• The yuan’s devaluation will be particularly harmful to the currencies of commodity exporting economies including the Aussie and Canadian dollars, and the rand. The yuan devaluation is bad news for the rand and for the mining resource sector and the problem is likely to get worse. As well as to reflate its economy the People’s Bank of China (PBOC) is expected to announce further “once-off” devaluations to stifle capital flight from China. In order to quell capital flight it may be necessary to devalue the yuan rapidly and to such an extent that expectations of further devaluation are removed.

• The yuan devaluation will cause commodity prices, which have already suffered sharp declines since the start of the year, to fall even further. A weaker yuan will raise the yuan price of imported commodities and therefore weaken demand. China accounts for over half of the world’s demand for mining resources, so the impact on base metals prices could be significant.

No one can really explain why this happened to occur this time of the year, but some just say, “It’s August”.

August has often witnessed the first cracks that presaged what later became profound shifts in the tectonic plates of the global economy — from the Russian debt default in 1998, to what Northern Rock boss Adam Applegarth called “the day the world changed,” when the first ripples of the credit crunch were felt in 2007; to August 2011, when ratings agency Standard and Poor’s sent shockwaves through financial markets by stripping America of its triple-AAA credit rating.

[source: fin24]