China Devalues Its Currency Yuan – Free PDF Download

WHAT IS A FLOATING EXCHANGE RATE?

• It is a monetary system that allows the exchange rate to be determined by supply and demand.
• Advantage– Real value of currency (determined by market forces).
• Disadvantage– Uncertainty in Trade & Investment.

 WHAT IS A FIXED EXCHANGE RATE?

• Also called pegged exchange rate.
• When a currency’s value is fixed or pegged by the Central Bank against the value of another currency.
• Advantage- Stability in Trade & Investment.
• Disadvantage- Prevents market adjustments when a currency becomes over or undervalued.
• Devaluation & Revaluation is related to Fixed Exchange Rate System.
• Whereas Depreciation & Appreciation is related to Flexible Exchange Rate System.

EXCHANGE RATE IMPACT ON IMPORT & EXPORT

• Devaluation or Depreciation leads to more EXPORTS & lesser IMPORTS
• Revaluation or Appreciation leads to lesser EXPORTS & more IMPORTS.

REALITY- MANAGED FLOATING EXCHANGE RATE

• Also known as Dirty Float.
• In this, exchange rates fluctuate from day to day.
• But also central banks from time to time influence their countries’ exchange rates by buying and selling currencies to maintain a certain range.

CHINA VS USA

IMPACT OF TARIFFS IMPOSED BY US ON CHINESE GOODS

• This will increase the price of Chinese goods in US market.
• Thus lesser exports by China to US and lower import by US from China.
• This may help the US industries & thus more employment.

WHAT CHINA DID TO COUNTER THIS MOVE BY US?

• China decided to let its currency yuan fall to an 11-year low below 7 per dollar.
• But this did not take place through Dirty Float or Market Forces.

WHAT IS A SHELL COMPANY?

• A shell corporation is a company or corporation that exists only on paper and has no office and no employees.
• It is mainly used for financial manoeuvres.

SHELL COMPANIES ROLE IN DEVALUATION?

• First China’s government & People’s Bank of China form many shell companies.
• Then these shell companies release large amount of Yuan through purchasing Dollars.
• This artificially leads to shortage of dollars & excess of Yuan.
• Thus the Chinese currency depreciates in money market.

DIFFERENCE BETWEEN YUAN & RENMINBI

• The RENMINBI is the official currency of the People’s Republic of China.
• The Yuan is the basic unit of the renminbi.
• 1 yuan is subdivided into 10 jiao. 1 jiao in turn is subdivided into 10 fen

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