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Yuan devalued by 2% to boost the Chinese Economy

On Monday, August 10th 2015, China’s decision to devaluate the Yuan by 2% became public. The reasons for the devaluation seem to be the falling exports and a slowed down manufacturing sector. With a depreciation of the Yuan, the Central Bank hopes to push down the borrowing costs and to increase China’s exports as it could offer cheaper prices again.
According to the People’s Bank of China the trading band was reset at 6.2298 US Dollar (-1.9%). The so called “one-off depreciation” causes the Yuan to be at its weakest point against the US dollar since three years.

In comparison to other Asian currencies, the Yuan against the dollar had become relatively expensive. As a result, China implemented fiscal, monetary and equity-boosting policies, but all of these attempts to diminish the fear of an economic slowdown seemed to fail.

Another or maybe the only way to boost the economy again was the depreciation of the Yuan. However, the consequences of devaluating the currency might be fatal. Most likely China’s competing currencies, like the Singapore dollar, the South Korean won or the Taiwan dollar, will fall as well. This “could generate headlines heralding the start of a devaluation war”, according to Masafumi Yamamoto, senior strategist at Monex in Tokyo (theguardian.com).
Also other currencies like the Australian dollar and regional markets reflect the impact of the depreciation as investors are worried about an ongoing fall in demand from China’s economy.

Next to the possible snowball effect of the world’s second biggest economy by GDP on the other Asian currencies, the devaluation could also set off copycat devaluations by central banks to keep their own competitive position against China.

 

Some other possible theories about the devaluation of the Yuan are (theguardian.com):

“The devaluation may be an attempt to make trading more open and market-based”, observers said.

“I don’t think this is a reaction to the weak trade data over the weekend, I think it’s because of the SDR,” said Zhou Hao of Commerzbank in Singapore.

“They need to have a market-based mechanism and they need volatility.”

 

InternChina - Yuan
InternChina – Yuan

 

Source:
The Guardian. 2015, China devalues yuan by 2% to boost flagging economy. [Online] Available at: https://www.theguardian.com/business/2015/aug/11/china-devalues-yuan-by-2-to-boost-flagging-economy [Accessed 11th of August 2015]