The Yuan’s devaluation has made
investors nervous (Mint)
Mains Paper 3:
Prelims level :
Mains level :
- Chinese yuan broke the seven-to-one parity against the dollar for the
first time since 2008. China deliberately devalued the Chinese currency
after the latest tariff threats issued by US.
Two reasons behind China’s Yuan devaluation
- China’s weakening manufacturing competitiveness is likely to strengthen
with yuan-priced goods and services getting cheaper across supply chains in
East Asia, parts of Africa, etc.
- It is likely to widen China’s trade surplus with the US in the immediate
- It will also help China expand trade margins within its own region,
especially with Vietnam, Thailand, Indonesia, etc.
- The US’ own strategic engagement in Asia has weakened under Trump, who
questioned the “value of US alliances with Japan and South Korea
- Japanese imposed trade restrictions on South Korea. China and Russia
staged their first joint aerial patrols in the region, causing South Koreans
to react militarily.
- China-US friction has offered significant economic and political
leverage to smaller emerging nations like Vietnam and Indonesia within their
respective regional spaces
- Risk not only for those trading in the US and Chinese currencies or
their stocks, but also for capital flows between emerging markets
- China, around 2015-16, tried something similar by letting the yuan
depreciate; it led to a stock market crash in China, and billions of its
dollar reserves disappeared in just a few days.
- That devaluation saw led to a massive capital flight from China, further
weakening its external position.
- The debt denominated in foreign currencies has increased for global
companies and developing nations across the world, and maybe vulnerable to a
currency shock if the “currency war” continues.
- Most foreign investors switched to the safety of gold or other
currencies like yen.
- China’s weakening of its currency to hurt US economic interests for
political gains will only make other Asian countries more vulnerable to a
political crisis that could quickly escalate to a financial crisis induced
by either a dollar currency crash or waves of capital flight.
- Any markets responding cautiously to the latest devaluation are correct
in issuing a “fragile" alert for investors for now.
Q.1) What is the Currency used by China?
Q.1) What are the key reasons behind YUAN devaluation? What are key problems
occurred in between two countries in terms of International trade?