Impact of Yuan Devaluation on China’s Economy

Impact of Yuan Devaluation on China’s Economy

China is one of the countries in the Asian region with a high economic rate. No half-hearted, China ranked second after the United States as a country that has a high economic influence in the international market. This is what causes China to always be associated with existing economic problems, especially if the economic problems are rooted in the country itself.

One of the big news regarding the economy in China is the devaluation of the Yuan. Own devaluation is defined as a decrease in the value of a country’s currency against the value of another country’s currency. The devaluation of the Yuan was reinforced by a statement from the Central Bank of China, PBOC which decided to reduce the Yuan exchange rate against the US dollar.

One strong reason why the Central Bank of China came up with this risky decision was because the Chinese government felt that the country’s domestic economy was very slow. When the devaluation was implemented, it was hoped that it could pump back the domestic economy, becoming a trigger for increased domestic consumption and increasing exports of Chinese products to the international market.

China’s economic slowdown

As was said before if China is a country that has a share in the quality of the world’s economic drivers. It would be very surprising if suddenly the devaluation was carried out on the grounds that the domestic economy was slowing down.Then what are the reasons underlying this economic slowdown experienced by China?

When a country is experiencing an economic slowdown, this indicates that domestic economic activity is losing its passion in both the production and consumption side. This can be caused by several factors including:

  1. Excessive Central Bank interest rates have led to a surge in bank lending rates so that creditors are reluctant to make capital loans for businesses.This has an impact with the existence of several real sectors such as manufacturing, services and trade do not carry out economic activities to the fullest.
  2. Economic costs that are too high. When production costs increase, some of these costs will be charged to products that are ready to sell so that consumers must feel the price increase of the goods to be consumed.

Impact of Yuan devaluation on the Chinese economy

Devaluation which is a risky act is certainly not without reason. It is expected that the devaluation carried out has an impact to improve the country’s economy, such as:

Increasing trade transactions – with the weakening of the value of the Yuan, is expected to pump up export-import activities in China. Because the declining value of the currency to a certain level will make the prices of domestic products more competitive and able to compete in the international market.

Increasing domestic consumption – the devaluation carried out is expected to increase economic growth driven by domestic consumption factors. If the product price is considered more affordable, domestic consumption will also increase.

Impact of Yuan devaluation on Asian and World economies

The strength of China’s economic milestones on the world stage certainly made a big impact after this devaluation was carried out. When the Yuan weakens, the US Dollar exchange rate will strengthen and further erode the exchange rates of other currencies including the Rupiah and other countries. Countries that experience this will be increasingly choked by the US Dollar exchange rate increase. In conclusion, the higher the dollar exchange rate, the higher the exchange rate against other currencies.

But on the other hand, the policy of devaluing the Yuan will make this currency cheaper as well as being an advantage for the economy of the country and the importing country. Products from China will surely boom in global markets at competitive prices and importers from other countries will enjoy the benefits of cheaper market prices.

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