Devluation of Yuan Essay

1519 WordsSep 30, 20157 Pages
What is devaluation? It refers to lowering the value of a nation's currency (here, yuan) with respect to a standard currency (the US dollar). It is done to deal with trade disparities, make exports cheaper, among other reasons. Why did China devalue yuan? Growth in China's manufacturing giants stagnated owing to successive decline in exports and imports. In July 2015, exports declined 8.3% year-on-year while imports also witnessed a sharp slump, falling 8.1%, after dropping 6.1% in June. Another matter of concern was the stock market turmoil in July 2015 that wiped out 30% of the value of shares. A huge balance of payments deficit (i.e. payments made for imports by a nation exceed payments received for exports, thereby causing more outflow than inflow of currency) lead Peopl's Bank of China (PBOC) to sell vast foreign exchange reserves, which kept yuan considerably overvalued, further lowering the competitiveness of Chinese businesses. The economic slowdown hit the Chinese economy in 2014 itself. Efforts taken to stimulate the economy including repeated interest rate and banks' reserve ratio cuts, among others, did not yield expected results. Therefore, to prevent further decline in exports and lift the drooping economy, PBOC devalued yuan by 1.9% against the US dollar on August 11 hoping that a weaker currency would make exports more competitive. However, officials argue that the real intention was to set exchange rates in accordance with market practices. PBOC called this a "one-off depreciation" but it further lowered yuan's value the next day, taking the total decrease to 3.5%. The move has pushed the currency to its lowest level since the devaluation in 1994. Across-the-board effects One of the thoughts doing rounds soon after the devaluation was that the world's second largest economy may be weaker than expected. Besides currencies of emerging

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