Devaluating Yuan A Masterstroke by China
I have been criticizing China for their aggressive international policy, but one thing I would like to appreciate is their economic policy for handling of their currency in the global market.
In the past and currently, many countries are worried about decreasing value of their currency, but China can devaluate Yuan without affecting their economic situation.
The economies of those nations have shown an adverse effect, but China is on raising aside.
So how did the Chinese economy is not only able to survive but also able to grow at a high pace? What are those steps that help China to achieve this? And how devaluating Yuan helped China? I will try to answer these questions in this blog
To understand this, first, we have to understand the difference between the Devaluation of currency and Deprecation of currency.
I have been criticizing China for their aggressive international policy, but one thing I would like to appreciate is their economic policy for handling of their currency in the global market.
In the past and currently, many countries are worried about decreasing value of their currency, but China can devaluate Yuan without affecting their economic situation.
The economies of those nations have shown an adverse effect, but China is on raising aside.
So how did the Chinese economy is not only able to survive but also able to grow at a high pace? What are those steps that help China to achieve this? And how devaluating Yuan helped China? I will try to answer these questions in this blog
To understand this, first, we have to understand the difference between the Devaluation of currency and Deprecation of currency.
Devaluation of currency –
Deprecation of currency –
In this situation, the value of currency gets lower due to demand and supply of money. This is relatively imbalanced.
1. So by this, we know that Chinese Govt. is devaluating Yuan so now let’s see how they can do it?
In this situation, the value of currency gets lower due to demand and supply of money. This is relatively imbalanced.
1. So by this, we know that Chinese Govt. is devaluating Yuan so now let’s see how they can do it?
Using other International currencies –
To manipulate Yuan China mainly used other currencies, China sells the coins in the international market to devalue Yuan. To understand it in better let’s taken an example, Due to export is more than import Yuan will get stronger than other currencies so to tackle this China increase supply of Yuan this increased supply reduces the value of Yuan. In this forex reserves play an essential role, and China has a vast forex reserve USD forex reserve.
Using gold reserve –
The gold reserve of the country has a significant impact on the value of the currency, and a land which has a massive amount of Gold in their reserves can stabilize their money and can manipulate it.
China is in 7th place when you calculate total Gold reserve.
Let’s understand it in detail.
The gold reserve of the country has a significant impact on the value of the currency, and a land which has a massive amount of Gold in their reserves can stabilize their money and can manipulate it.
China is in 7th place when you calculate total Gold reserve.
Let’s understand it in detail.
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The world gold council report (2019)
As you can see in above fig. the US is number one with 75% of total world gold reserve and China is in 7th place, and India is in 11th place.
So this shows how USD has such stable rates. This does not mean the country with the lower reserve cannot manipulate their currency the most prominent example of this the situation is the UK which is in 18th place then to their money (Pound) is much stronger than Indian Rupee.
Let’s understand why Gold reserve is necessary, the gold which is in the treasury of the central banks of the country can be used as the emergency money means this the reserve can be sell in emergency and help stabilize the currency.
To understand this let’s take an example India’s currency was losing its value in the international market in 2018 so to secured the Rupee RBI (Central Bank) purchased gold in Sept. of 2018, and this showed a positive impact on Rupee Value.
As you can see after the purchase of the gold value of Rupee is stabilized.
-
The world gold council report (2019)
As you can see in above fig. the US is number one with 75% of total world gold reserve and China is in 7th place, and India is in 11th place.
So this shows how USD has such stable rates. This does not mean the country with the lower reserve cannot manipulate their currency the most prominent example of this the situation is the UK which is in 18th place then to their money (Pound) is much stronger than Indian Rupee.
Let’s understand why Gold reserve is necessary, the gold which is in the treasury of the central banks of the country can be used as the emergency money means this the reserve can be sell in emergency and help stabilize the currency.
To understand this let’s take an example India’s currency was losing its value in the international market in 2018 so to secured the Rupee RBI (Central Bank) purchased gold in Sept. of 2018, and this showed a positive impact on Rupee Value.
As you can see after the purchase of the gold value of Rupee is stabilized.
2. How devaluating Yuan helping exporters –
When the value of the home currency gets lower the exporter gets more profit and export increases business which results in a rise in GDP of the country. Currency rate and shipping have an inverse relationship as the value of currency decrease export increases. This is happened due to exporter gets more money for the same amount of product.
When the value of the home currency gets lower the exporter gets more profit and export increases business which results in a rise in GDP of the country. Currency rate and shipping have an inverse relationship as the value of currency decrease export increases. This is happened due to exporter gets more money for the same amount of product.
Let’s understand it with an example, let’s assume a seller in China sells 1 kg Oranges at $5 and the exchange rate is $1 = 15 Yuan then the seller will get 75 Yuan for that 1 kg of oranges and when China devalued Yuan to $1 = 20 then the seller will get 100 Yuan for the same amount of peaches. In this seller enjoys more profit without changing anything.
Let’s understand it with an example, let’s assume a seller in China sells 1 kg Oranges at $5 and the exchange rate is $1 = 15 Yuan then the seller will get 75 Yuan for that 1 kg of oranges and when China devalued Yuan to $1 = 20 then the seller will get 100 Yuan for the same amount of peaches. In this seller enjoys more profit without changing anything.
3. How China devaluation helped China to grow fast –
As we have seen above how devaluation has the inverse relationship with Exports, depreciation has a direct connection with Import as the currency gets devalued Import falls.
As imported things get expensive, this gives a boost to the economy of the country due to export more and import less.
More export-led to more production, more production means more employment and more the production which led to the high growth in the GDP.
As we have seen above how devaluation has the inverse relationship with Exports, depreciation has a direct connection with Import as the currency gets devalued Import falls.
As imported things get expensive, this gives a boost to the economy of the country due to export more and import less.
More export-led to more production, more production means more employment and more the production which led to the high growth in the GDP.
As imported things get expensive, this gives a boost to the economy of the country due to export more and import less.
More export-led to more production, more production means more employment and more the production which led to the high growth in the GDP.
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www.wikipedia.com
As you can see China Export less and Import more this gives China a boost and helped to become an exporting superpower.
As you can see China Export less and Import more this gives China a boost and helped to become an exporting superpower.
Conclusion –
By devaluing Yuan China gives an edge to their producers in the international market, due to this Chinese goods are available at a much lower rate than competitors.
In the end, I would say it was a masterstroke by China.
By devaluing Yuan China gives an edge to their producers in the international market, due to this Chinese goods are available at a much lower rate than competitors.
In the end, I would say it was a masterstroke by China.
In the end, I would say it was a masterstroke by China.
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