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Reasons for devaluation of Chinese yuan & its impact
China’s Central Bank ” People’s Bank of China ” has recently devalued the value of yuan in terms of US$. All the countries were surprised by this sudden action of China. It’s a debatable issue whether it was done as a measure of balancing the trade or a beginning of currency war ? This has to be answered by Chinese government and People’s Bank of China.
On the other side it is claiming that this action is to protect the yuan from the falling trend so that the economy will perform good.
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Reasons for devaluation
From the past months there has been a decreasing sign in the exports of China whereas no significant change in Imports. This was a sign that the value of Chinese yuan in terms of US dollar will fall eventually.
To manage the value of yuan China has devalued its value so that the cost of Imports for which payment is done in US$, will increase. If the cost of Imports raises then the there may happen two scenarios. One is that the demand for the imported goods may decrease. Another one is that the increasing trend of Imports will become stable.
And the amount of exports from China on which its growth story is based was slowing down which impacted the value of Chinese yuan negatively. It is said that this is the main reason behind devaluation of Chinese yuan so that the cost of the products imported from China will become cheaper internationally. Thus there will be a tremendous growth in Chinese exports , which could save the Chinese falling economy.
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Impact on world markets
(1) The raising demand for yuan which has become cheaper then earlier will definitely impact the US$ in negative manner. The reason is simple that the cost of Imports in to China will increase as a result of devaluation. As most of the Imports done by China are from US and Europe. Hence the demand for the imported goods will decrease than earlier. And the increasing demand for Chinese made products which has become cheaper than earlier will pull down the value of many international currencies including dollar.
(2) This may even result in increasing the prices of American made goods which are priced in US $. For example if China is importing product A from US for which payment has to made in $. As a result of devaluation of yuan the number of dollars to be paid to buy from the US will increase thus become costlier. So the demand for the US made goods will slower down in Chinese market. Eventually the impact is on US economy slowing down its exports which may lead to decreased demand for the dollar in future.
(3) As the cost of goods imported from China falls down the demand for China made goods will increase in India than earlier. This may impact the Indian economy adversely. In order to gain the advantage falling yuan people in India may think to buy from China instead the other. So this may eventually increase the Imports from China and may force the value of rupee adversely.