China being the second largest force after USA, devalued their currency. Chinese Currency - Yuan Devaluation Rate = 15 – 20% Devaluation made by last August ’15

1. Devaluation of
Chinese Currency
Surya Kumar
VIT BS

2. Scenario
• China being the second largest force after USA, devalued their
currency.
• Chinese Currency - Yuan
• Devaluation Rate = 15 – 20%
• Devaluation made by last August ’15
• Prediction made that at the end of FY 2016, China can spark
the Asian market.

3. Introduction
 World's most populous country with a population of over
1.3 billion.
 China is 3rd biggest country in the world in term of area.
 2nd economy (in terms of nominal GDP) of the world after
United State of America (USA).
 More than 700 million of its 1.3 billion people live in rural
area,
 During the past 30 years China’s economy changed from a
centrally planned system to a more market-oriented economy
that has a rapidly growing private sector and is a major player
in the global economy

5. The term Foreign exchange implies two things: a)foreign
currency and b) foreign exchange rate
• “Foreign Currency" means any currency other than Indian
currency;
• "Foreign Exchange" refers to the global market where
currencies are traded virtually around-the-clock. The term
foreign exchange is usually abbreviated as "forex" .
For example -> Rs. 48.50 per one USD
Forex is the international market for the free trade of
currencies. Traders place orders to buy one currency with
another currency.
Meaning of Foreign Exchange

6. Devaluation
"Devaluation" means lowering the value of a country's currency
within a fixed exchange rate system. Here monetary authority
formally sets a new fixed rate with respect to a foreign
reference currency.
When does devaluation happen?
• Happens mostly in developing countries
• The nation will be forced to devalue its currency if its
market is too weak to justify the exchange rate.
• Avoid financial crisis, for which they adopt policies to
maintain a stable exchange

7. Reason
• To make people buy from their own market
• To boost sluggish overseas sales
• To increase the exports
– Last July China saw a sharp 8.3% fall in export.
Situation
• Increase in the exports from china
• Reduction in the imports to china
• Increase in growth and employment
• Increase in the Forex reserves
• Reservations in the IMF’s special drawing rights
(SDR) basket

8. Effect of
Devaluation
Globally

9. Global Impact
• Currency devaluation of china is not a problem within Chinese
border, but it has become an Global problem.
• By devaluing the yuan, Chinese authorities are turning to a
controversial growth-boosting tactic whose effects by their
nature reverberate far and wide in the global market
• Raises risks of market volatility in other emerging market
economies like India.
• If China’s devaluation deepens, pressure to weaken currencies
could become particularly intense in other Asian nations that
export large amounts to China

10. Global Impact
• Now particularly in US and Europe, Chinese imports has
become more cheaper than ever.
• Thus it not only creates problems for local producers in these
regions, it also makes the task of pushing inflation up harder.
• This could prolong the global recession.
• It compounds the levels of uncertainty in the global financial
markets.
• High-tech entrepreneurs say they are having even more
difficulty securing financing as investors grow more cautious.
• The global economy is very fragile, competitive currency
devaluations could in turn affect China's own economy -
undermine its exports and investment.

11. Global Impact
• China has been trying producing cut-price consumer goods for
the rest of the world. - “Made in China”
• The devalued yuan will force China’s Asian rivals, such as
Indonesia and South Korea, to compete even harder in
response
• In coming months, weak Chinese demand could force down
the cost of many commodities, from oil to iron ore.
• Cheaper yuan cuts the price of imports, this will undermine
inflation and could delay a rate rise.
• China accounts for more than a quarter of Australian exports.
So weakness in the Chinese economy is bad news for
Australia.

12. Global Impact
• Research by consultancy Oxford Economics last week, which
modelled the impact of a 10% Chinese devaluation,
accompanied by a sharp slowdown, suggested other hard-hit
countries could include Brazil, Russia, Chile and Korea.
• If Beijing allows the yuan to decline further in coming months,
it could increase trade tensions, or even a “currency war”
• The direct impact of this devaluation on the U.S. includes
lower prices on imported goods while slowing sales of cars
and other U.S. goods in China.
• Devaluation in the yuan is more of a hairline crack in the
world economic order than a seismic shift

13. India and the devalued Yuan

14. Impact - The good, the bad and the ugly
• India directly experiences the drop in the import price of
Chinese commodities to India
• Reduction in the value of china’s currency
– Lead to slowdown in China’s commodities demand, hence commodity
prices too got reduced.
– This favors India to enjoy lower commodity prices (Eg: Petroleum Oil
and Copper products).

15. • Flip side to falling commodities prices in China
– Indian based operating companies like iron & steel mining, chemicals,
drugs, Cigarettes and few trading companies has to reduce its price too.
– Some of the debt running companies will have more stress
– Indian manufacturers have already complained of dumping below cost.
(Anti-Dumping Duty should be imposed)
• China becomes more competitive than India over their exports
for lower price (in similar segments)
– Particularly textiles and apparels—as well as chemicals and project
exports.
• Reduced capital flows on emerging market yields and slowing
growth.
Impact - The good, the bad and the ugly

16. Devaluation of currency
Advantage
• More of Forex reserves
• More exports
Disadvantage
• Limited Imports
• Restricted people to buy
within their country
• Huge impact on Forex
existing borrowings
• Causes Inflation (Demand
Pull - rising demand for
exports)