A friend of mine recently asked what implications exist for the Chinese Yuan devaluation— specifically as it relates to Iran Nuclear negotiations. I had not thought about the connection until being asked the question. After thinking about it, I settled on "significant".
At first glance the Yuan devaluation appears to be another of many emotional and seemingly uncoordinated reactions to the downturn in the Chinese A-share stock market, as I've written about here. Trillions worth of stock market gains have been wiped out out almost as soon as created.
Expect fits and starts over the ensuing decade as Chinese government officials learn to reconcile a command and control economy with the machinations of unpredictable capitalist free markets.
That being said, history may judge the Yuan devaluation as a timely stroke of brilliance. The devaluation is a pre-emotive move in advance of a Fed Rate hike. Let the currency wars begin, or rather, persist.
A Fed rate hike will "theoretically" cause the U.S. dollar to strengthen. I say theoretically because, as I have written about here, continued dollar strength is a not a foregone conclusion. Until 2005, the Yuan operated on a peg to the dollar. Since then, it's peg has been relative to a basket of major currencies, USD, Yen, Euro etc. While not as explicit in years past, USD strength translates into Chinese Yuan strength.
While having a strong currency is manageable for economies with a domestic engine like the U.S.—70% of US GDP is driven by the consumer-- for a nascent and developing consumer economy heavily reliant on exports to fuel growth, like China, currency strength can result economic headwinds, if not outright deflation. Think about Greece, whose economy is completely driven by tourism. Deflation, falling asset prices, causes civil unrest... not exactly what the Chinese command and control authorities want to deal with.
China has made great strides to increase its influence among emerging and frontier markets to secure the natural resources it will need to fuel infrastructure growth over the next few decades. A strong Yuan weakens trade relations with those markets from an economic perspective by making Chinese goods more expensive. Case in point, China is Iran's largest trading partner. A weaker Yuan enhances the appeal of Chinese exports at a time when sanctions on Iran are being lifted. Iran is a key source for petroleum and a center of influence in the oil rich region.
The Yuan devaluation achieves two objectives: 1) protect a favorable competitive trade position and 2) spur what has been the engine of Chinese economic growth over the last several decades—exports.