Devaluation of Yuan - A Good Move?
Devaluation of Yuan - A Good Move?
China distressed global financial markets by announcing devaluation of its local currency. The move was made so that its exchange rate mechanism follows a more market-oriented approach. The Yuan’s value dropped 1.9% on Tuesday, followed by a further decline of 1.6% on Wednesday. The magnitude of drop in Yuan value on Tuesday was the biggest one-day decline in a decade.
China doesn't let Yuan trade freely in global financial markets as the U.S. does. Instead, it links its currency's value to a basket of global currencies. The composition of this basket is not disclosed but is stated to be dominated by the U.S. currency. After linking, China restricts trading to a band range of 2% below or above a daily target defined by the People's Bank of China. This target of 1.9% on Tuesday came as a shock for the global markets. What do you think? Do you think that devaluing Yuan was a good move from China? What can be its pros and cons on China and other economies?
Yes
- Considering China has immense foreign exchange reserves, the judicious depreciation of the renminbi is helpful in stabilizing its economy. It is why the decision should not result in large-scale capital outflows. Thus, it is a good move.
- Higher aggregate demand and exports can result in higher rates of economic growth. This is what China needs, especially at a time when commodity market is facing a tough price environment.
- Exports become more competitive and cheaper to foreign buyers. It will boost the domestic demand and result in job creation in the export market.
- Higher exports should result in narrowing of the current account deficit. Devaluation is vital if the nation has a huge current account deficit due to poor competitiveness.
No
- China’s U.S. dollar denominated debt in no way would gain from a devalued Yuan. Sustained weakness in the Yuan would turn it expensive to repay the huge $1.1 trillion of debt that is owed by Chinese firms.
- The sudden shift in the fixed mechanism at the People’s Bank of China highlights a market based fixing system.
- There is a lot of uncertainty and anxiety over how the fix is going to be estimated? The uncertainty of system on the onshore market and other broad currency market is distressing the global financial markets.
- The move is going to increase inflation as imports become more expensive and aggregate demand results in demand pull inflation.
- Long-term devaluation can result in lower productivity because of the sharp drop in incentives. Also, it lessens the purchasing power of residents abroad.
Conclusion
Definitely, the sudden Yuan depreciation has pros and cons not only for China's economy but also for global markets. However, in perspective of China, as long as the decline remains moderate and slight rather than a spiky decline, the benefits offset the disadvantages. The recent exchange rate adjustment doesn't imply that the Yuan will remain severely devalued. In the coming period, a better two-way floating exchange rate will lead to the yuan's internationalization. In addition, a slight devaluation of Yuan can reduce the downward pressure on Chinese economy, which in turn will prove beneficial for the global economy
Discussion
- RE: Devaluation of Yuan - A Good Move? -abhi (09/07/15)
- Good for china:
- china is export driven economy and seeing the turmoil in the world economy where imports are depreciated, the only way to maintain the market share is to keep the product of pricing low.
- china is seeking its place in global currency basket and hence to demonstrate and to make yuan popular depreciation is tool that china is playing.
- china is trying to maintain its unprecedented growth rate(which is above 10 for long) this move will enhance the export.
bad for other countries-
- this depreciation will rage a currency war and will hamper the export and market share of other countries.
- this will force countries like india to devalue their currency. it will hamper the growth and will make indian currency more volatile.
- severe inflation will rise not only in other countries but also in china.
- RE: Devaluation of Yuan - A Good Move? -Deepa Kaushik (08/18/15)
- Devaluation of a local currency definitely has its own pros and cons. Devaluation of Yuan alsao carries its own impacts. Since China comes in the list of exporters of manufactured gooids, devaulation of the currency would leave its impact on the global scale as well.
Devaluation of a currency, if depreciated slightly once in a while can be regulated ancd balanced well. On the contrary, long term depreciation of the currency would have severe effect on the economy of the country. China being the manufacturing hub, its majority employement is through the world export.
Depreciation of the currency would demand more labour than usual to achieve the usual slab of exported products. This added labour might be adjusted against the incentives of the labours. On a long run, the hit in the wages or incentives would be discouraging for the employees, which would in turn reduce the net output which would slap down the economy of the nation drastically.
For the rest of the world, ity could be beneficial as they can import products in a better rate. Still, the country itself would sink down further into the debts which would become more burdensome with the depreciation of the currency.
