The Impact of the Devaluation of the Yuan
Written by: Sarah Kaderavek
The devaluation of the yuan, a unit of renminbi, by The People’s Bank of China impacts both the Chinese economy but also international trade within the global economy. Over the last 5 years, the Chinese yuan, the unit of renminbi, has been depreciating in value, since banking is centrally controlled within China (Sommer). However, on August 11th the drop in worth was the steepest it had been in a single day, in a very long time (Gibley). These action is taken by China to either start a “currency war” or improve its own economy. Many economists and politicians have begun to debate the true scale of the impact caused by the devaluation of a single country’s currency as well as the country’s motives for doing so, all of which are questions of normative economics. Putting opinions aside, overall devaluation of the yuan is one of many steps China is taking to improve its own economy.
The main way benefit China receives from devaluing its own currency is a comparative advantage in production over the country’s they are involved in trading with. As the yuan lowers, China is able to export a greater amount of goods (Gibley), in the long run, cheaper than it costs for countries such as the United States to do so, rather than hurting the Chinese economy though it may seem so at first glance. The short-term issues with devaluing the currency will be outweighed in the long-term as China is transitioning to a more competitive based economy.
Since China is able to export for cheaper, countries are able to import goods for cheaper as well. Thus, the yuan depreciation somewhat benefits the United States in the short-run, opposite to China. However, in the long run the United States will lose manufacturing to China due to value of the yuan compared to the dollar (Sommer). Thus further supporting, China has created an artificial advantage in production over other countries. More specifically the United States, as the yuan is compared to the dollar and not a major currency (Bloomberg News).
Economic theories which involve comparative advantage and trade do not account for manipulation of resources or currencies (or at least the theories I am so far familiar with) which is seen in this situation. International trade should benefit both countries, however as soon as advantages are tampered with through currency, one country may be better off than the other. Overall, the devaluation of the yuan has and will continue to affect trade between countries.
Works Cited:
Bloomberg News. “Could China’s Yuan Devaluation Spark a New Financial Crisis?.” Bloomberg.
N.p., 23 Aug. 2015. Web. 13 Sept. 2015.
Gibley, Michelle. “Currency Wars: Is Weaker Currency Bad or Good?.” Charles Schwab. Charles
Scwab and Co., 14 Aug. 2015. Web. 13 Sept. 2015.
Hunt, Katie. “China Devalues its Currency: What You Need to Know.” CNN. Cable News
Network, 12 Aug. 2015. Web. 13 Sept. 2015.
Sommer, Jeff. “Currency Devaluation is a Short Step in China’s Long Advance.” The New York
Times. The New York Times Company, 22 Aug. 2015. Web. 13 Sept. 2015.
The article you wrote reminds me of the hyperinflation that occurred in Germany during World War 2. The currency and the price of goods both increased at the same time. According to the video that was linked, Germany's experience seems similar to what is happening now in China, however, their country still has time to recover and revive its currency issues. If you hadn't pointed it out, I wouldn't have noticed that the change in currency could benefit the international trade. Overall, the topic you chose was intriguing and I feel like I know a lot more about China than I did prior to reading the article. Well done!
ReplyDeleteI agree with Christina, this is similar to what happened in Germany. Although, after reading your article I never thought too much about how international trade could later on in the future cause problems for one or both of the countries. As you mentioned, when the U.S will lose manufacturing from China due to the value of yuan then China will still have some sort of advantage if it still makes trades with other countries. Even in the future if the value of yuan were to changes, causing China to produce more for the U.S than they ever had before, it would still not benefit China as much either, since they wouldn’t be receiving as much back as they produced. However, China will most likely always have a comparative advantage for the short or long run.
ReplyDeleteBouncing off of what Christina and Minha were saying about Germany's hyperinflation (thus resulting in devaluation) of their money...I believe that Germany had a different circumstance because their economy was in ruins because of this factor, whereas you stated how the devaluation of the Yuan is actually helping to repair their overall economy. You also mentioned another factor of our economic vocabulary recently learned by talking indirectly about China's command economy turning more so into a market economy. This was a good example of how China, although labeled as having a Communistic economy actually is trending towards the Capitalistic way of society with more competition (as you so stated). Also, great job on your writing this seems like a very complex topic that you managed to simplify!
ReplyDeleteGoing along with what Christina said, like in California how their minimum wage was increased to 9 dollars an hour. With wage amount increasing, everything along with it will increase too. I believe in this case, it will affect the U.S. because the international trade prices would increase because China's money is worth more so everything will become more expensive to buy. I find this topic very interesting and I like the way you approached it.
ReplyDelete