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By Jason Stipp and Jeremy Glaser | 08-13-2015 02:00 PM

Why China Rocked the Boat This Week

Our take on the ripples from China's currency move, Google's new Alphabet, Buffett's big deal, and more.

Jason Stipp: I'm Jason Stipp for Morningstar and welcome to The Friday Five, Morningstar's take on five stories in the market this week.

Joining me with The Friday Five is Morningstar markets editor Jeremy Glaser.

Jeremy, thanks for being here.

Jeremy Glaser: You're welcome, Jason.

Stipp: Up first this week, in a big surprise China devalued its currency, with a lot of knock-on effects potentially. What's your take?

Glaser: We thought this would be a quiet week in August. They really made sure that was not going to be the case.

When China devalued the yuan, they took the rate that it trades against the dollar and brought it down. That happened over the course of a couple of days this week. There were a few factors at work in why they decided to do this, and then we'll talk about why the market was so concerned about this.

The official word is basically that they wanted to have the market play a bigger role [in their currency valuation]. This is something the IMF and others have been pushing in order for their currency to get reserve status, something that China has been seeking. They thought that this would give them an opportunity to show that they are willing to let the market have a bigger sway.

Then also it does help to devalue their currency. Given that they are having a slowdown and some issues in their manufacturing sector, having a lower currency versus some of the other big global currencies certainly is a help for them.

But the market in some places really sold off considerably on this news. I think there are a couple of factors behind that. First are concerns that this is really just the start of devaluation, and that it's going to be much larger than the ones we've seen so far this week and could start a currency war--where it would be a race to the bottom in terms of devaluation. There are worries that it could export deflation around the world by bringing prices down at exactly the time that Central Banks are trying to increase inflation in a lot of places. So it's probably the last thing we need.

There is also a sense this could be a problem for commodity prices because it shows that the Chinese economy really is much weaker than people even thought if they are willing to make this type of move, and that could put pressure on commodities, which is not good for other emerging markets that have a lot of commodity sales or big commodity economies.

I think the other thing that's somewhat concerning is that even though they did say, "We're going to let the market have a bigger say," at one point they intervened pretty aggressively at the end of trading on Wednesday to make sure that it didn't fall too much. They were really sending some mixed messages here: OK, we're going to let the market take some off, but oh, not too much.

And you add in some of the things that they've been doing in terms of supporting the stock market, such as halting trading in some stocks and having big stock purchases. It raises questions about whether the central government is up to the economic management. Are they are going to be able to handle an economic slowdown and have a graceful, so-called soft landing. Maybe that becomes a little bit less likely. People are a little bit concerned about the economic management.

I think this is a fascinating story--not one that's going away anytime soon--and it definitely created a lot of issues and a lot of interesting conversations.

Stipp: In another big surprise this week, Google is reorganizing itself, resulting in a new company called Alphabet. What are the details?

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