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Long Story Short: Currency devaluation: hurting or helping?
China currency devaluation: Who is this helping?
As President Trump threatens to impose more tariffs on goods from China, the response was China devaluing their currency. For the first time in more than a decade, the yuan is at an all-time low of 7 yuan per dollar. With investors fearing that this will have a heavy impact on global growth, many have got out of their Asian currency investments associated with exports and moving to safer investments, like the Japanese yen. Although this may lead to economic growth for China, it may lead to increased inflation and a currency war worldwide.
More competitive exports. China devaluing the yuan makes exports more globally competitive. This is because it reduces the cost of exports, allowing the increased volume to spur economic growth. This could make their prices more attractive to other foreign buyers that wouldn’t have otherwise purchased from them before.
Higher levels of economic growth. With the cost of exporting goods cheaper, more foreign buyers may purchase more quantities of goods. This could allow the economy of China to see large growth economically and in the job market. More workers may be needed to keep up with the increased demand in goods.
Decreased deficit. Trade deficits may shrink because as exports increase and imports decrease, the balance of payments could reduce their trade deficit. The strong demand for cheaper exports outweighs the imports, shrinking the deficit over time. With the continuing trade war and no defined end point, China may even be able to produce some the goods for less than they would spend purchasing abroad.
Disrupted global market. As China devalues its currency, it reduces the cost of exports and increases the cost of imports. This effort to strike back at the Trump administration for wanting to impose further tariffs. This devaluation has caused market-wide panic as global stocks fall. Investors are seeking safer investments, some moving toward treasuries.
Potential currency war. If China decides to further devalue its currency, it could give gateway to a currency war. Some experts say that this could leave other countries that compete in similar industries feeling that they should devalue their currency as well. This could potentially lead to a spiraling of devaluations, damaging global growth and leading to higher inflation.
Reduced purchasing power. Currency devaluation reduces the purchasing power of citizens. It makes it more expensive for citizens to spend their dollars abroad, since the yuan has a decreased value per dollar. If the trade war continues and China choose to further devalue their currency, this purchasing power will continue to decline.
The trade war will continue. China’s currency devaluation was in response to the Trump administration’s decision to impose 10% tariffs on $300 billion of Chinese imports. The currency devaluation could spur economic growth for China, as the cost of exporting goods drops, allowing them to increase the volume of exports. However, currency devaluation could lead to a currency war between countries, causing market-wide inflation.
https://www.cnbc.com/2019/08/05/forex-markets-chinese-yuan-japanese-yen-in-focus.html, Reuters August 5th, 2019
https://www.reuters.com/article/us-china-markets/china-lets-yuan-break-key-7-level-for-first-time-in-decade-as-trade-war-worsens-idUSKCN1UV061, Andrew Galbraith and Winni Zhou August 4th, 2019
https://www.nytimes.com/2019/08/05/business/economy/us-china-yuan-renminbi-trump.html, Alexandra Stevenson August 5th, 2019