China’s Currency Devaluation
China devalues its currency “Yuan”. This is the most elevated topic now a days in financial market as there is a fear of seeking a ‘currency war ‘.
On Tuesday morning, 11th August,2015 the people bank of China depreciate the yuan by nearly 2% against the US Dollar which comes as a surprise policy change in International currency market. In last two decades, this is the sudden largest devaluation in currency which increased the stock market volatility in China’s market. China’s move in devaluation its currency is in order to help exports so that it can boost its economy. A weak currency cheapens the price of a country’s exports , making them more attractive to international buyers by undercutting competitors.
China stunned the world financial market again on Wednesday by devaluing its currency for the second consecutive day, triggering fear in its economy worse than the investors believed. It has make the yuan fell to 6.43 against the dollar , its weakest point since August 2011. This moves of China sent shock waves through global market, pushing equity market sharply lower and sending commodity prices further into reverse as traders believed that move could ignite a currency war that would destabilized the world economy.
For the straight third consecutive day on Thursday, central bank weekens its currency further by 1.1% after previous official cut .This continuously devaluation of yuan not only boost china’s export by making its goods cheaper in abroad , but also pushes economic reform as it seeks to become one of the reserve currencies in the International Monetary Fund’s SDR Group. Inclusion in the IMF ‘s currency basket means it would lend significant prestige to the yuan , which will be use more and more frequently to execute international transaction and payments.
IMF SRD –International Monetary Fund special drawing rights basket, which the organization uses to value reserve assets. The basket includes Dollar, Euro, British pound and Japanese Yen.
CONSEQUENCES
- The cuts in China’s currency has put the financial market on edge , sparking worries of a “Currency war” as other countries feel pressure of devalue and raising questions about the wealth of a world’s second largest economy, where growth is slowing. If the other nations in the region also decided to devalue their currency in response, it could leading to a so called competitive devaluation, known as currency war.
- The Rupee fell to the lowest against the dollar in two weeks on Tuesday (August 11), tracking a stronger greenback after China devalued the yuan by nearly 2%.
- The move may push the Reserve Bank of India to cut interest rates. Lower interest rates will put off foreign investors and will further weaken the rupee.
- Experts also said that Chinese government intervening in the market by making its currency cheaper may affect the US economy.
- China’s appetite for commodities from gold to crude oil to copper is likely to be hurt in the near term after the country’s surprise decision to devalue its currency.
