Hello everyone.
On 11th August, 2015, the secondary markets across the globe tumbled because the People's Bank of China (PBOC) depreciated their currency the renminbi by approximately 2%.
Here in this post, we would try to find out about the implications of the same but first we would have a look at the reasons for the same.
China, which is majorly an export driven economy has been under-performing for sometime because falling exports. Devaluation would mean that their goods would be more competitive in the world markets as compared to other goods which could help them in increasing the demand.
Some other reasons are:
1) China wishes to turn their currency into an International Reserve Currency (like the US Dollar) which is a strategic move. Since the Chinese currency was managed by the PBOC within a range, now they are moving free float wherein the market forces determine the exchange rates.
2) China wants to get its currency added into the basket of currencies in IMF's Special Drawing Rights basket which is kind of a synthetic reserve asset. The current composition of the basket is US Dollar, the British Pound, the Euro and the Japanese Yen. It is a matter of prestige if any country's currency is added to this basket.
The criteria for being included in the basket are
a) The country must be a among the leading exporters of the world
b) The currency is freely usable
The Implications for the World are
1) This could be a signal of Recession in the Chinese Economy. The country is trying its best to move to a Consumption driven economy from an export driven one. They are also faced with a property bubble.
2) Availability of Cheaper Commodities
3) The proposed rate rise by US Fed could be delayed.
4) Currency wars by other countries
5) The move puts pressure on other central banks around the world to push down their own currencies to help their own exporters and to prevent destabilizing capital flows. The move could hurt commodities markets because it signals potential weak demand from China. It could also accelerate capital outflows out of China, especially if investors expect further devaluations.
Hope I have covered the major points in this post.
Would appreciate your comments
On 11th August, 2015, the secondary markets across the globe tumbled because the People's Bank of China (PBOC) depreciated their currency the renminbi by approximately 2%.
Here in this post, we would try to find out about the implications of the same but first we would have a look at the reasons for the same.
China, which is majorly an export driven economy has been under-performing for sometime because falling exports. Devaluation would mean that their goods would be more competitive in the world markets as compared to other goods which could help them in increasing the demand.
Some other reasons are:
1) China wishes to turn their currency into an International Reserve Currency (like the US Dollar) which is a strategic move. Since the Chinese currency was managed by the PBOC within a range, now they are moving free float wherein the market forces determine the exchange rates.
2) China wants to get its currency added into the basket of currencies in IMF's Special Drawing Rights basket which is kind of a synthetic reserve asset. The current composition of the basket is US Dollar, the British Pound, the Euro and the Japanese Yen. It is a matter of prestige if any country's currency is added to this basket.
The criteria for being included in the basket are
a) The country must be a among the leading exporters of the world
b) The currency is freely usable
The Implications for the World are
1) This could be a signal of Recession in the Chinese Economy. The country is trying its best to move to a Consumption driven economy from an export driven one. They are also faced with a property bubble.
2) Availability of Cheaper Commodities
3) The proposed rate rise by US Fed could be delayed.
4) Currency wars by other countries
5) The move puts pressure on other central banks around the world to push down their own currencies to help their own exporters and to prevent destabilizing capital flows. The move could hurt commodities markets because it signals potential weak demand from China. It could also accelerate capital outflows out of China, especially if investors expect further devaluations.
Hope I have covered the major points in this post.
Would appreciate your comments
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