Why china devalues its currency

Why China is devaluing its currency?

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Why China is devaluing its currency?

China has been doing it for years.

Yes, it’s Currency Manipulation.

So, what is it?

It’s an act of Devaluing the currency and ;

Altering the exchange rate to gain competitive unfair advantage.

Wait, there’s more.

We will understand how and Why China does that?

But first get to the basics.

Introduction

After China opened to the world for Trade in 1980s, it has achieved significant economic growth.

This also led International Monetary fund, to give China’s Renminbi currency, YUAN, a badge of elite global currencies alongside US dollar, Euro, Pound , and Japanese Yen.

Meanwhile,

It has become ‘Factory of the world’.

As every country imports goods from China.

And so to do that, importing country wants currency of exporting country. As a result, demand of latter increases.

And if the demand increases, so does the value.

It makes China expensive to importers.

Which is why China has started manipulating its currency. 

How does China manipulate its own currency?

What do they do is simple. 

They buy huge amounts of other currencies like US Dollar, Euro, British Pound among others to soar their demand.

Now, by buying it increases the supply of Yuan in the forex market, thereby increasing demand for other major currencies. 

This devalues the Chinese currency and comparatively makes other currencies stronger.

What compels China to do it?

You see, everything works on Demand and Supply.

As China has been the world’s factory its industries are booming. The manufacturing scene and infrastructure are robust. 

This has led the world to import goods from China which are way cheaper and readily available.

And as China has a trade surplus meaning it exports more than it imports. Yuan remains in demand.

By this, the Yuan value is poised to increase.

And if it increases, China becomes expensive to other countries. They stop buying from there.

Any country wouldn’t want that. And so as China. It wants to eliminate the negative effect of a strong currency. 

If countries stop importing from China. China loses business to other countries like India, which has a more advantageous currency. 

But by manipulating meaning decreasing its currency’s value, China prices can remain competitive in the international trade market. Most competitive in fact. 

This results in, bagging in more trade from countries as goods now are even cheaper than before. 

Simply put, they make their country cheaper.

Why China is devaluing currency?

While devaluing currency helps in increasing exports. It also helps in curbing imports.

As Yuan value is less in the market, Chinese consumers have to pay more of it to buy something abroad.

Goods becomes expensive. It discourages foreign spending.

So, that’s a win-win situation from both sides.

For example-

If Yuan becomes weaker.

Then a dollar can buy more Yuan, importers from the US have to pay less dollars for the same amount of Yuans.

Similarly, Chinese have to pay more Yuan to buy products abroad.

Which absolutely curb imports as goods become expensive overseas. 

Other than that, if more and more countries produce in China, employment rates increases, govt. gets taxes, and overall economy is lifted by that foreign capital.

Lastly, as few might argue but as economies grow their Per Capita Income rises, which in the case of China has led to an increase in Labour wages which used to be low before.

This again makes manufacturing expensive. And to avoid that China has stuck to the same option.

This all is part of a larger plan eyeing towards becoming THE ECONOMIC POWER.

Bottom Line

China has been doing it for years and the World is pretty agitated by it. 

This act of China results in harming businesses, consumers, and others that depend on steady relations between the world’s two largest economies.

It has thought to have cost the US millions of jobs as a result from losing business.

The US has called China ‘The Currency Manipulator’ amid going war between the two. 

This is also the reason which the People’s Bank to China gives for devaluing its currency.

Saying ‘Yuan was weakened because of trade protectionism and imposition of tariffs on China.’ 

US remains the most affected as the it recorded a whopping $345.6 billion trade deficit to China in 2019 even after Trump’s tariffs.

China’s Currency Manipulation not only harms one country but nearly every developing country. Not to mention that it takes away billions of dollars of business from India which it otherwise would’ve gotten.

Conclusion

As world is trying to unite against China,

The US has also cried to IMF to eliminating this unfair practice of China.

But results remain to be seen.

Concluding it can be said, that by devaluing the currency China is reaping benefits at the cost of others.

This may not be forever.

Let’s see what happens.

We can’t predict anything. Can we?

Till next Thursday 🙂

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