1. Lovely Professional University
School Of Business And Applied Arts
Presentation on:
POLICY OF DEVALUATION :
“A CASE STUDY OF CHINESE ECONOMY”
Presented By
Sumair Nabi
Asma Khanam
&
Jehangir Ali

2.  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.
 The 1st in manpower (in term of population).
 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,
 The 2011 Human Development Report shows China
lies at 101 in a list of 187 countries
 China's economy during the past 30 years 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.

3.  It refers to decline in value of a currency
with respect to other currencies, which is
most of the times brought by central bank.
 It should not be confused with term
depreciation of currency which is a decline in
currency value due to market forces without
interference of government.

4.  This happens mostly in developing countries
which don’t allow currency prices to be
determined by market forces.
 They want to avoid financial crisis, for which
they adopt policies to maintain a stable
exchange rate to minimize exchange rate risk
and save their gold (foreign currency) reserves.
 The nation will be forced to devalue its currency
if its market is too weak to justify the exchange
rate. Example a country has depleted foreign
reserves and is not credit worthy to borrow from
IMF then it has to pay for its imports by
devaluation. When currency is overvalued or a
country wants to reduce trade deficit then
devaluation is used as a policy tool.

6.  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

7.  China is running a huge trade surplus. China
is slowing the world’s economic recovery
with its currency devaluation policy,
estimated at 40%.

8. 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 RBN-Yuan currency, but
in order to achieve Additional Objective like
running a huge GLOBAL TRADE SURPLUS with
rest of the world (exporting more than
importing).

9. China manipulates its currency by setting its
value lower than it is worth truly worth.
Value of currency depends on:
(i)Relative Economic Growth (positive
relationship)
(ii) Relative price level ( negative relationship)
(iii) Relative real interest rates( positive
relationship)

10.  Within the Keynesian framework, currency
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 following a real
devaluation.

11.  From 1985 to 1993, the Chinese government
devalued the two exchange rates against
the dollar several times.
 These devaluations were not realized
simultaneously most of the time. Often, one
of the two rates stayed stable and played the
role of a monetary anchor. It contributed
thus to slow down inflation, and favoured
the real depreciation of exchange rate.

12.  On 1st January 1994, China radically changed
its policy. The double exchange rate system
was suppressed; the swap rate became the
unique official rate for all transactions.
 On 21 July 2005, the Chinese authorities
decide to revalue the renminbi of 2.1% vis-à-
vis the dollar, to switch from the dollar peg
to a basket, and to allow the currency to
float more freely.

13.  Since this date, the renminbi was
progressively revalued against the dollar.
 From 2005 to 2009 the renminbi appreciated
of 17% in terms of dollars and its real
bilateral rate appreciated of 18 %.

14.  Asia:
 maintain export as element of business model.
 Europe:
 Euro provides opportunity for domestic growth,
uncertain opportunities for exports.
 U.S:
 Slow domestic growth, other than technology (little
domestic opportunities).
 Looking external for opportunities.

15.  Most important among Asian countries,
market of 1.2 billion people have not been
Subject to the currency crisis and is
subjected to pressure.
 Economic growth
- Revised GNP growth for China 7%
-GNP Growth for world 2%.

16.  China is growing in both power and
influence. It overtook Japan as the second
largest economy.
 Growing at a much faster rate than Japan,
about 10% annually.
Globally, it has the following impacts...
 Fastest-growing major overseas market for
the United States. Undervalued yuan helps
China’s export sector by making foreign
imports more expensive, and Chinese exports
cheaper. It encourages outsourcing
production and jobs from the United States,
contributing to unemployment at home.

17.  Till 1990s .China was successful at
maintaining a currency peg against US dollar,
using monopoly.
 But later China devalued its currency for
which it was blamed by various countries for
relying on it ( promote exports).
 It has the gains in two ways:
 Its exports become more competitive.
 It attracts higher foreign investment.

18.  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 were
to devalue 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 their goods

19.  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.

20.  Also ,China is not democratic like India
hence people’s voice against inflation would
be suppressed.

21.  The value of trade between the United
States and China is more affected by
currency changes than that of the US-Euro
area or the Euro area-China.
 The 10% depreciation of the US dollar leads
to 10%appreciation of Chinese-Yuan.
 Euro area trade with China is less impacted
by changes in exchange rates.

23. Note: All figures are in millions of U.S.
dollars on a nominal basis, not seasonally
adjusted.
Table is taken from U.S Department of
commerce: United States Census Bureau

24.  In 2012:-203,121.5
 In 2011:-295,422.5
 In 2010:-273,063.2
 In 2009:-226,877.2
 In 2008:-268,039.8
 In 2007:-258,506.0
 In 2006:-234,101.3
 In 2005:-202,278.1
 In 2004:-162,254.3

25.  China should take into consideration
inclusive growth.
 Constant large trade surplus(devaluation)
is not a good strategy as due to it economy is
largely effected by global economic changes.
 There is a desperate need of restructuring
the economy, china must resort to it.
 China must let the value of it's currency by
market forces to maintain political and
economic stability globally.

26.  China should more emphasize on the quality
of its products in the global market rather
than availability on lesser price.
 China should use its trade surplus to increase
the standard of living of its rural population
rather than buying US securities.