In a time when countries are trying to strengthen their currencies by proposing new policies, China did the reverse. What did it do? What seemed like a suspicious move, China went ahead and devalued its Yen in 2015.
In August 2015, China’s central bank devalued the country’s currency, the renminbi, by about 2% against the U.S. dollar. It was the biggest one-day move since the renminbi, or yuan, officially de-pegged from the U.S. dollar in 2005. The yuan maintains a close relationship with the dollar and trades 2% in each direction from a midpoint selected by China. Today, that midpoint went from 6.11 yuan per U.S. dollar to 6.22.
Most American politicians said that China is purposely devaluing its currency to help exports. After all, its economy is struggling to hit the government 7% growth target. Industrial production, investment and retail sales data for July were weaker than expected, while at the weekend numbers showed Chinese exports tumbled 8.3% in July, their biggest drop in four months. After a string of weakening output growth figures going back to last year, the authorities have come intense pressure internally to address the slowdown with a dramatic policy shift.
However the truth is that, China has recently actually wanted its currency to steadily rise, for political reasons and to keep capital from flowing out of China. China’s domestic and international goals are to constitute a stronger yuan. That helps explain why presidential candidates like Trump haven’t been spouting off about China’s currency management as much of late.
Therefore how can it help the Chinese economy? Chinese businesses compete with regional rivals to supply the world with everything from raw steel to microwaves, and a cheaper yuan will make Chinese exports less expensive, potentially boosting the overseas sales and becoming the key drivers of advancement during the nation’s remarkable rise over the past three decades. However, controls on the currency have given Chinese businesses a high degree of predictability when they plan investments in industries heavily dependent on exports.
What is the long term plan? The long-term plan is to build on the 2005 reforms in an effort to have the yuan included in the International Monetary Fund (IMF) basket of special drawing rights (SDR) reserve currencies. Its controls have become a stumbling block in gaining admittance to the select group of the US dollar, the euro, the pound and the yen. The bank’s move to include more information when setting its daily fix can be seen as a relaxation of controls, moving the currency a step closer to satisfying the IMF’s entry requirements.
How did the US respond? The devaluation prompted an angry reaction from the US, arguing that the yuan is undervalued, damaging US exports. It could also force other Asian countries to devalue, unfortunately making exports to the US cheaper and increasing Washington’s trade deficit further.