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Effect of the Devaluation of the Yuan on China

On August 11, 2015, the People’s Bank of China (“PBOC”), the central bank of the Republic of China, first devalued Chinese currency, the yuan.1.  What exactly does this mean? The Chinese government changed the way that the currency was valued and this therefore caused a decrease in value. The value of the yuan was previously determined using a strategy developed by the PBOC.2 China previously didn’t allow the yuan to trade freely in financial markets as the United States does.3 “Instead, it links the yuan’s value to the U.S. dollar. Then it restricts trading to a band 2 per cent above or below a daily target set by the [PBOC].”4

The devaluation meant that the yuan was changed to allow for market movement to play a bigger role in the value of the currency. The yuan’s daily value is now fixed to the U.S. dollar currency’s closing level from the previous day.5 When the PBOC changed its valuation method to allow for markets to have an impact on the yuan, this caused the value to decrease on August 11, 2015. Since 2005, the Chinese currency has appreciated approximately 33 percent against the U.S. dollar and the first devaluation on August 11 marked the largest single drop in twenty years.6 By keeping a tight grip on the valuation mechanism of the yuan, the Chinese government was able to insulate China from the impacts caused by market turmoil, which included the Asian financial crisis and the global financial crisis.7

What caused the Chinese government to let go of it’s tight controlling grip? This question has sparked a great amount of debate amongst economist and analysts. Outwardly, the change in valuation methodology has been explained “as a key reform that allows the market to steer the currency’s value. Central to this is a bid to have the yuan accepted by the International Monetary Fund into its basket of reserve currencies, placing the yuan on par with the dollar, euro, yen and British pound, and boosting China’s global stature.”8 Additionally, China’s president Xi Jinping has been adamant about the government’s commitment to reforming China’s economy in a more market-oriented direction ever since he first took office over two years ago.9  The more cynical view to the change flows from the reasoning that “the devaluation came days after data showing a big fall in exports. A mix of interest-rate cuts and fiscal stimulus to spur growth has struggled to gain traction. So, by weakening the currency, the thinking is that shipments will get a jump start and rev up the economy.”10

Did the devaluation of the yuan give the Chinese economy the boost that the government expected? Not exactly. The effects of the change are certainly not having the impact that the government expected. In fact, the Chinese economy has continued to stumble. In 2015, the Chinese economic growth rate slowed to a twenty-five year low of 6.9 percent.11 Additionally, secondary industry, or manufacturing, growth slowed to 6 percent in 2015 from 2014’s 7.3 percent.12 Furthermore, the Chinese people are starting to lose confidence in the yuan.13  Wealthy families have started to move large sums of money out of China as they have a well-founded fear that the value of the currency will continue to fall and their savings will be worth less.14 The practice “is part of an exodus of capital that is casting doubt on China’s economic prospects and shaking global markets. Over the last year, companies and individuals have moved nearly $1 trillion from China.”15 “The currency has become a very near-term threat to financial stability [in China],” said Charlene Chu, an economist at Autonomous Research.16

 

 

 

 


  1. Enda Curran, Why China Devalued the Yuan, bloomberg (Aug. 13, 2015), http://www.bloomberg.com/news/articles/2015-08-13/why-china-devalued-the-yuan. 

  2. Joe McDonald & Paul Wiseman, Australian Dollar Plummets After China’s Currency Gambit, news.com.au  (Aug. 12, 2015), http://www.news.com.au/finance/economy/world-economy/why-did-china-devalue-its-currency/news-story/2f18cadef44439ea402057ef2c37103f. 

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  6. SeeLingling Wei, China Moves to Devalue Yuan(Aug. 11, 2015), http://www.wsj.com/articles/china-moves-to-devalue-the-yuan-1439258401. 

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  9. See Celia Hatton, China’s Xi Jinping: What Has He Achieved in His First Year? BBC (Mar. 9, 2014), http://www.bbc.com/news/world-asia-china-26463983. 

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  11. Leslie Shaffer, China’s Economy Grew 6.9 Percent in 2015, a 25 Year Low, cnbc (Jan. 18, 2016), http://www.cnbc.com/2016/01/18/china-reveals-key-q4-2015-gdp-data.html. 

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  13. Keith Brasher, Chinese Start to Lose Confidence in Their Currency, n.y. times (Feb. 13, 2016), http://www.nytimes.com/2016/02/14/business/dealbook/chinese-start-to-lose-confidence-in-their-currency.html?src=me&_r=0. 

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