Written by Abhishek Roy, GEI Associate
The Chinese economy is one which has the world keeping on close watch for the last several months, and up until a few weeks ago the conclusion drawn, in Beijing, was to not make any drastic changes in the value of the currency in order to offset any economic decline.
However, now there is a new reality. On August 11th, the yuan was given the largest devaluation in its history, by devaluing it against the dollar by 1.9%. In one day it was the largest drop in 20 years. In the ensuing days the yuan devalued further until it has settled near 6.40 to the dollar, a total devaluation of just over 3% in less than a week.
This is a very important decision with global implications, considering the relationship currently between the United States and China, as well as the upcoming meeting between President Xi Jinping and United States President Barack Obama. This decision indicates to a degree that China is having difficulties with balancing their economy while trying to push economic reform. This is also an attempt visibly to favor domestic exporters in the international markets.
One of the reasons as to why this was done is the possible shortfall for the expected economic growth of 7%. This is an issue due to all of the infrastructural expenditures that China will be incurring due to a massive change in the economy and nation. There are now possibilities of deflation, as well as delayed interest rate rises. This is due to an eventual cut of imports.
These devaluations are a direct reflection of the central bank, which demonstrably has a major level of influence on the Chinese economy as well as decision making concerning growth. These results will potentially have large impacts involving currency, not only domestically, but internationally as well. Significant shifts in exchange rates and increased volatility can be expected.
