Devaluation of Chinese Currency

Surya KumarVIT BS

Scenario• China being the second largest force after USA, devalued their

currency.• Chinese Currency - Yuan• Devaluation Rate = 15 – 20%• Devaluation made by last August ’15• Prediction made that at the end of FY 2016, China can spark

the Asian market.

Introduction World's most populous country with a population of over

1.3 billion. China is 3rd biggest country in the world in term of area. 2nd economy (in terms of nominal GDP) of the world after

United State of America (USA). More than 700 million of its 1.3 billion people live in rural

area, During the past 30 years China’s economy changed from a

centrally planned system to a more market-oriented economy that has a rapidly growing private sector and is a major player in the global economy

The term Foreign exchange implies two things: a)foreign currency and b) foreign exchange rate• “Foreign Currency" means any currency other than Indian currency;• "Foreign Exchange" refers to the global market where currencies are traded virtually around-the-clock. The term foreign exchange is usually abbreviated as "forex" . For example -> Rs. 48.50 per one USD

Forex is the international market for the free trade of currencies. Traders place orders to buy one currency with another currency.

Meaning of Foreign Exchange

Devaluation"Devaluation" means lowering the value of a country's currency

within a fixed exchange rate system. Here monetary authority formally sets a new fixed rate with respect to a foreign reference currency.

When does devaluation happen?• Happens mostly in developing countries• The nation will be forced to devalue its currency if its market is

too weak to justify the exchange rate. • Avoid financial crisis, for which they adopt policies to maintain a

stable exchange

Reason• To make people buy from their own market• To boost sluggish overseas sales• To increase the exports

– Last July China saw a sharp 8.3% fall in export.

Situation• Increase in the exports from china• Reduction in the imports to china• Increase in growth and employment• Increase in the Forex reserves• Reservations in the IMF’s special drawing rights

(SDR) basket

Effect of Devaluation

Globally

Global Impact• Currency devaluation of china is not a problem within Chinese

border, but it has become an Global problem.• By devaluing the yuan, Chinese authorities are turning to a

controversial growth-boosting tactic whose effects by their nature reverberate far and wide in the global market

• Raises risks of market volatility in other emerging market economies like India.

• If China’s devaluation deepens, pressure to weaken currencies could become particularly intense in other Asian nations that export large amounts to China

Global Impact• Now particularly in US and Europe, Chinese imports has

become more cheaper than ever. • Thus it not only creates problems for local producers in these

regions, it also makes the task of pushing inflation up harder.• This could prolong the global recession. • It compounds the levels of uncertainty in the global financial

markets. • High-tech entrepreneurs say they are having even more

difficulty securing financing as investors grow more cautious.• The global economy is very fragile, competitive currency

devaluations could in turn affect China's own economy - undermine its exports and investment.

Global Impact• China has been trying producing cut-price consumer goods for

the rest of the world. - “Made in China”• The devalued yuan will force China’s Asian rivals, such as

Indonesia and South Korea, to compete even harder in response

• In coming months, weak Chinese demand could force down the cost of many commodities, from oil to iron ore.

• Cheaper yuan cuts the price of imports, this will undermine inflation and could delay a rate rise.

• China accounts for more than a quarter of Australian exports. So weakness in the Chinese economy is bad news for Australia.

Global Impact• Research by consultancy Oxford Economics last week, which

modelled the impact of a 10% Chinese devaluation, accompanied by a sharp slowdown, suggested other hard-hit countries could include Brazil, Russia, Chile and Korea.

• If Beijing allows the yuan to decline further in coming months, it could increase trade tensions, or even a “currency war”

• The direct impact of this devaluation on the U.S. includes lower prices on imported goods while slowing sales of cars and other U.S. goods in China.

• Devaluation in the yuan is more of a hairline crack in the world economic order than a seismic shift

India and the devalued Yuan

Impact - The good, the bad and the ugly• India directly experiences the drop in the import price of

Chinese commodities to India

• Reduction in the value of china’s currency– Lead to slowdown in China’s commodities demand, hence commodity

prices too got reduced.– This favors India to enjoy lower commodity prices (Eg: Petroleum Oil

and Copper products).

• Flip side to falling commodities prices in China– Indian based operating companies like iron & steel mining, chemicals,

drugs, Cigarettes and few trading companies has to reduce its price too.

– Some of the debt running companies will have more stress– Indian manufacturers have already complained of dumping below cost.

(Anti-Dumping Duty should be imposed)• China becomes more competitive than India over their exports

for lower price (in similar segments) – Particularly textiles and apparels—as well as chemicals and project

exports.• Reduced capital flows on emerging market yields and slowing

growth.

Impact - The good, the bad and the ugly

Devaluation of currencyAdvantage• More of Forex reserves• More exports

Disadvantage• Limited Imports• Restricted people to buy

within their country• Huge impact on Forex

existing borrowings• Causes Inflation (Demand

Pull - rising demand for exports)