1. BACKGROUND

On August 5, 2019, the People's Bank of China allowed the yuan to weaken beyond 7 per US dollar for the first time in more than a decade. This move has caused global markets to experience a significant amount of volatility.

2. EFFECTS ON CHINA

A weaker yuan makes Chinese exports cheaper, potentially increasing demand and therefore boosting China's economy. However, a weaker currency could also lead to capital outflows as Chinese investors seek to invest in stronger currencies overseas. This could cause a decrease in foreign investment in China, which could negatively impact the country's economic growth.

Additionally, a weaker yuan could increase inflation in China as imported goods become more expensive. This could lead to the Chinese government increasing interest rates to try and control inflation, which could decrease borrowing and investment.

3. EFFECTS ON THE UNITED STATES

The Trump Administration has accused China of currency manipulation in order to gain a trade advantage and has criticized the weakening of the yuan. A weaker yuan could make Chinese imports cheaper, potentially increasing demand for them in the US, which could increase the US trade deficit with China.

On the other hand, the strong dollar resulting from the yuan's weakness could negatively impact US exports as they become more expensive for foreign buyers.

4. EFFECTS ON GLOBAL MARKETS

The weakening of the yuan has caused global markets to experience significant volatility. This has resulted in decreased investor confidence, as uncertainty increases. The decline in Chinese stocks and the drop in Hong Kong's Hang Seng Index has also impacted global markets.

The decrease in foreign investment in China could also lead to decreased investment in other emerging markets, causing investors to become more risk averse.

5. CONCLUSION

The weakening of the yuan below 7 per US dollar has caused uncertainty and volatility in global markets. While a weaker yuan could potentially benefit China's economy, it could also lead to capital outflows and inflation. The impact on the US and other global markets remains uncertain, but the increased risk aversion of investors does not bode well for emerging markets.