Devaluation of Chinese currency ( Yuan) . A comprehensive case study.

DEVALUATION OF CHINESE CURRENCY (YUAN)

Presented by Mr. Rohit BanskotaMr. Santosh Adhikari

A BRIEF DETAILS ABOUT CHINA

CAPITAL BEIJINGLARGEST CITY SAHANGAIOFFICIAL LANGUAGE STANDARD CHINESEGOVERNMENT SOCIALIST SINGLE PARTY STATELEGISLATURE NATIONAL PEOPLE’S CONGRESSAREA 95,96,961 SQUARE KMGDP $ 11.212 TRILLIONPER CAPITA INCOME $ 8,154CURRENCY YUAN OR RENMINBI $1= 6.17

YUAN

INTRODUCTION The people of China is a sovereign state in East Asia with

population of over 1.35 billion The PRC is a single party state governed by the communist

party of China China is the world’s second largest country by land. China share the border with 16 countries including Nepal,

India, Bhutan, Burma etc. China is also the world’s largest exporter and second largest

importer of goods

CONT…

China was one of the first nations on earth to create currency and replace barter

China experimented paper money around 910 AD during the first dynasties period.

Much later in 1989 the Yuan was introduced as a silver coin derived from Spanish dollar

Much later the modern Yuan is also called Renminbi (RMB) which translate as people currency

CURRENCY

Currency refers to money in any form when in actual use or something that is used as a medium of exchange.

In today’s economy a currency is generally accepted form of money, including coins and paper notes, which is issued by a government and circulated within an economy. Used as a medium of exchange for goods and services, currency is the basis for trade.

It can be classified into fiat money and commodity money.

EXCHANGE RATE

A price of a nation’s currency in terms of another currency. An exchange rate has two components i.e. Domestic currency

and Foreign Currency. Exchange rate could be determined through (a)Fixed &

(b) Floating. The Moment of exchange rate can be understand through

appreciation and depreciation

DEVALUATION & REVALUATION

Devaluation means a deliberate downward adjustment to the value of a country’s currency, relative to another currencies.

Devaluation is a monetary policies tool of countries that have a fixed exchange rate or semi fixed exchange rate.

Revaluation means increase in the price of the currency within a fixed exchange rate system.

WHAT CAUSES THE FLUCTUATION IN CURRENCY

VALUE

Changes in the imports and exports of the currency Changes in the interest rate Changes in inflation rate Exchange rate policies Government policies

ADVANTAGES & DISADVANTAGES OF DEVALUATION

Export become cheaper and more competitive to foreign buyers.

Lead to an improvement in the current account deficit. Higher exports and aggregate demand can lead to higher rate

of economic growth. Import are more expensive. Cause demand pull inflation due to AD. Reduces purchasing power of citizen abroad

EXCHANGE RATE MANIPULATION

Effects of reduction in the exchange rate : A reduction in the exchange rate will reduce export prices and assume demand is elastic hence export revenue will increase. A fall in exchange rate will rise import and assume elasticity of demand import spending will fall.

EXCHANGE RATE MANIPULATION Cost pull inflation: A fall in exchange rate is inflationary for a

second reason because the cost of imported raw materials adds to production costs and creates cost pull inflation.

EVALUATION OF EXCHANGE RATE POLICY

Exchange rate policies can be evaluated through a) No. Of share of output traded internationally. b) Changes in Exchange rates( Devaluation & Revaluation) Hence lowering exchange rate called devaluation can raise

aggregate demand, increase GDP, Create Jobs through multiplier effect & Lead balance of Payment.

Alternatively raising exchange rate called revaluation can help reduce excessive aggregate demand, control inflation.

HOW COUNTRY DEVALUE THEIR CURRENCY

Countries devalue their currencies only when they have no other way to correct past economic mistakes - whether their own or mistakes committed by their predecessors.

It does encourage exports and discourage imports to some extents and for a limited period of time. As the devaluation is manifested in a higher inflation, even this temporary relief is eroded.

Devaluation can be made through : a) Fixed Exchange rate b) Floating Exchange rate – crawling peg, base band, snake in the

tunnel

CHINA EXCHANGE RATE POLICY

In 1994 exchange rate regime was fixed ( Pegged) and devaluation was done by 2%

In 2005 end of fixed exchange rate ( pegged) and introduce floating exchange rate ( managed exchange rate).

And currently devaluation is done by 1.9% ( 11th Aug 2015).

DEVALUATION OF YUAN FOR THE FIRST TIME IN TWO DECADE & WHY IT MATTER

During 1994 devaluation took place for the first time having close to 2% of its value

Who decide that the Yuan is worth? How is the Yuan’s value controlled? What changed about how the Yuan is valued? What will happen next?

WHY CHINA CURRENCY CRISES MATTER?

It could be serious A less costly Christmas Cheaper petrol pump Delayed rate rises Deflation, deflation, deflation Even more pain for Greece Currency war

WHAT CHINA YUAN MOVE MEANS FOR EMERGING MARKETS

Heavy losses for emerging market that export commodity to China

It is also a major concern for developing countries that compete with china in exporting similar goods and services to similar destination.

Lower the future path of USA Developing countries have to suffered against the

strengthening of US dollar and expectation of higher interest rates.

IMPACT CAUSE IN PRESENT SCENERIO

A spectacular crash in the Chinese stock market in which 30% of value of share was wiped.

Government astonished an array to measure to try to stop share price sliding

Financial institution like insurance companies to increase their exposure to stock.

Hence there is short game and a more important long game The positive impacts of this strategy can outweigh the near

term risk

FX TOP GAINERS AND LOSERS IN LAST FIVE WEEKS

CONCLUSION

China devalued the Yuan by 1.9% against the US dollar for the second time to boost the export and to take it a step nearer to becoming an official reserve currency.

U S A consistently arguing that devaluation damaging US export and this could force other Asian countries to devalue, making export to the US cheaper and increasing Washington's trade Deficit.

Chinese businesses compete with regional rivals to supply the world with everything from raw materials to finished goods thereby making product readily available with written tag “MADE IN CHINA”

CONT…

Currency value is a powerful economic lever in any nation and china ‘s economy is weakening

Flow of money have hurt china too Devaluation become inevitable as a result. The weaker Chinese currency could hurt emerging Asian

nations