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Currency Wars

Currency Wars – Chinese throw the first salvo by devaluation of yuan

Chinese Yuan Devaluation

No one would have been spared out with the news of Shocking move of China to depreciate the value of chinese currency Yuan. The present condition of the world where every nation is trying hard to keep pace up with the USD, China did something unusual so as to meet up their target which they had set. Even India wouldn’t have thought of such move to act on INR. So what had been the Main reasons for the depreciation of Yuan and Why is so much of instability in market due to this.

On around August 11, 2015 China started the day in the Stock market with a shocking move which forced every nation to start working on their economic growth. China Devalued its Currency Yuan by 2% against USD. Even The US Super power whose Currency is made an Index for the trades weren’t spared to think about the consequences of such move. China actually gives preference to the Growth Rate and this move showed that they don’t care about their money but primarily focused on its growth. China announced that this step was taken to meet up with the growth target which China had set. This devaluation would decrease the imports and consumption in within China but boost the Exports which the Nation had been starving of. This can be seen as when the yuan devaluates the commodity gets more expensive within the country for the people to buy so they will loeer their consumption. Though this will make it more hard for western commodities to sell in China as because that would have become more expensive in one of the largest market of world.

It was said that this devaluation was a onetime depreciation so as to meet up with the growth target of 7%. But what actually china wanted was a more strong currency on mark with USD. This devaluation was used up by China to boost its exports and also for bringing up international use of Yuan. Though this step had a bad impact on currencies of Australia, South korea falling atleast 1%.

Let’s understand this with an example. Suppose china manufactures a mobile for 5$. Pre depreciation exchange rate was around 1$ for 6.2 yuan ie. 1yuan = 0.161$. and post Depreciaiton exchange rate wer 1$ = 6.35 yuan ie. 1Yuan = 1.57$. so now if the mobile is sold in US and comparing the prices we would see that the prices have fallen for the Chinese good after devaluation which would make people more attracted to it. People would go for cheaper products than for expensive ones and would buy the mobile manufactured in China. This would boost the exports for China.

Now the problem with this move. The depreciation and the increase in exports of Chinese goods make it harder for the exports of the other countries to be sold. This made the exports of countries to fall. Now in the Indian context this Chinese devaluation has affected the nation internally really badly. As now the Chinese goods are cheaper so now there will be more demand of these goods and thus there will be less production of that good in India. The logic is simple if you are getting a cycle at Rs 2000 made in china why would run for Indian Made Rs 3000 cycle. Surely this will fall the demand for Indian made cycle and thus this will cause turmoil in the industry. Now as the Indian industry isn’t able to sell the products in India so they are running low on profit and high on loss. To cope up with this low profit turnover and as companies want always to maximise profit, they will fire out workers and thus making tens of thousands and lacs of unemployment situation. The countries like India would face deflation which could get serious if India will not depreciate its currency too but as of till now India is firm on this and not taking any such step as this would be really harmful for the country and also that this wouldn’t recover countries’ exports.

Though Raghuram Rajan, The RBI Governor had a different take on this issue. He said the chinese move wasn’t a thing to worry and that India is not on the approach of any type of Crisis. India was in a good condition as compared to other nations.

The position for india may have been different but directly or indirectly india surely will be at loss as india is a trading nation dealing largely in exports. It noe completely depends on the autonomous banks and trade unions to look in the matter if it gets way much serious.

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Tathagat Sarthaka
Hansraj Economics Student DU hailing from Bhagalpur, Bihar, Love to write occasionally, Part time Poet, looking forward to get busy with work....

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