One of the main headaches that has plagued financial markets in recent months is the possibility of further devaluation of the Chinese yuan. It would make Chinese exports even more competitive and is therefore seen as a risk that reinforces deflationary pressures on world markets.
The recent devaluation however does not compensate the significant appreciation of the Chinese currency over many years previous. Since the gradual relaxation of the exchange rate peg with the US dollar in the summer of 2005, the Chinese currency soared by 37 percent until early 2014. Over the same period, it shot up by almost 29 percent against a trade-weighted basket of important trading currencies.
During this spell, whopping current account surpluses, large capital inflows from abroad and frequent interventions by the Chinese central bank to keep a lid on any further appreciation led to a massive increase in foreign reserves to almost $4 trillion (up from $711 billion in mid-2005).