Why was Yaun Devalued

2. In October 2014, the Takshashila Institution published a discussion
document on the China outlook for 2015. Events have followed that pattern
that the document anticipated. China’s economy is slowing and the domestic
economy is not rebalanced. Net exports constitute an increasingly larger
share of China’s gross domestic product, despite some real appreciation
of the Chinese Yuan in recent months. China has maintained a stable
exchange rate in furtherance of its geo-political and geo-economic goals. Soon,
they will clash with the harsh and worsening underlying economic reality in
China. A significant devaluation of the Chinese currency in the months ahead
is likely. This will badly hurt India’s competitiveness as the country is woefully
underprepared to take advantage of the worsening competitiveness of China’s
exports. That window will close with the Yuan devaluation that is
anticipated. In conclusion, the discussion document noted that “in the course
of 2015, India should be prepared for a substantial Yuan depreciation, which
attracts only symbolic condemnation but no significant international
condemnation or sanctions.”

3.  Since 2003, devaluing its currency to gain a
competitive market in exports
 China purchases billions of US dollars at a time
using its currency, thereby flooding the market
with Yuan, making it cheaper, and the US dollar
expensive in international currency markets,
Provides an advantage for China because with a
cheaper currency, purchasing Chinese goods is
cheaper. This has made Chinese exports soar over
the past years and indirectly hurt the exports of
other countries

4.  When the People’s Bank of China-Central Bank
Of China buys or sells currency (own or
foreign) not only to set that particular desired
value of own RMB -Yuan currency, in order to
achieve huge GLOBAL TRADE SURPLUS
(exporting more than importing) as compared
to the rest of the world.

5.  Devaluation boosts economic growth by
promoting net exports, aggregate demand, and
output through the multiplier effect.
 On the supply side, devaluation is clearly
contractionary. Production suffers because
imported inputs get costlier.

6. It has the gains in two ways:
 Its exports become more competitive.
 It attracts higher foreign investment

7. Let us assume 1 USD = Yuan 100.
Now if a good costs Yuan 200 in china, a buyer in the US will
have to pay USD 2 .
Now if China devalues its currency to USD 1 = Yuan 200,
what would happen??
Now the same product which was costing Yuan 200 in
China would Cost the American buyer only USD1 instead of
USD 2.
Due to it, Chinese goods have been selling to across the
world and countries find it inexpensive to buy from China,
getting economies of scale which if may pass to on to its
customers ,thereby making Chinese goods more
competitive.

8.  Considering the second point, It would need a huge
market and low costs of production, like labour and
land. So its clear China’s exports surpass its import
requirement and hence the trade off is in favour of
China..
 Another challenge is of rising inflation.
As the Yuan devalues, the central bank will have to
print more Yuan to balance the surge in dollars
through increased trade. But as china has abundant
land and labour, they are able to off set the
inflationary pressures by higher productivity
through economies of scale.

9.  India's performance, with exports declining for
eight months in a row, was one of the worst in the
group. While the rupee has fallen by about 1.5
per cent against the dollar since the Chinese
devaluation & is continuing to decline.
 China is India’s largest goods trading partner.
India has a whopping trade deficit with China
close to $50bn in 2014-15 on account of rising
imports coupled with weak export dynamics.

10.  India’s major export items to China consist of primary
commodities with cotton, copper and mineral fuels
alone constituting more than 45 per cent of the total
exports. Meanwhile, India’s major imports from China
are electrical machinery and nuclear appliances (55
per cent of total imports).
 A reduction in the cost of Chinese goods can also
aggravate the problem of dumping into India from
China. Toy makers, Steel industry and Mobile Industry ,
Automobile Spares & Accessories industry are already
reeling under the increasing dumping cases from China
as lower currency incentivizes the country’s exports.

11.  China is growing in both power and influence. It
overtook Japan as the Second Largest Economy
in the year 2010 & is continuing to do so.
 Moreover ,China is not democratic like India
hence people’s voice against inflation would be
suppressed.
 Chinese economy has been weakening sharply in
recent times and a weaker Yuan could purely
serve the purpose of building growth through
boosting exports.

12.  Export fell 8.3% a year ago, a weaker currency helps
China’s exporter to sell their goods abroad.
 Last year Euro has dropped about 18% against dollar
and Yen dropped about 22%, but Yuan (RMB)
appreciated against the dollar, due to which China
started to facing more competition in the export market.
 China Command leadership role in the global economy,
and an important piece of that is establishing the Yuan
(RMB) as a reserve currency. (Yuan approved as Reserve
Currency w.e.f Oct 2016)
 China would like Yuan (RMB) to have a similar impact
like Dollar & Euro have on global trade and finance,
especially in Asia followed by the Globe.
 It Would help to improve the growth of the economy as
well. (China being an Export Oriented Economy)