The following article is based on my own interpretation of the said events. Any material borrowed from published and unpublished sources has been appropriately referenced. I will bear the sole responsibility for anything that is found to have been copied or misappropriated or misrepresented in the following post.
Subhro Sen, EMBA 2015-18, Vinod Gupta School of Management, IIT Kharagpur
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The Chinese Yuan devaluation continues to haunt the world markets.
Many are interpreting the devaluation as a part of an undeclared currency war – a battle in which countries are trying to steal jobs and growth from their neighbours by cheapening their own currencies. Countries such as India, the Philippines, and South Korea are wrestling with that issue now. Being China, they must have considered the potential positive effects on growth, as well as the potential political risks, before devaluation.
Cutting the value of their currency is not a policy that will boost the world’s economy. It will come at the expense of export growth in other countries. For China, it will mean cheaper exports in the short run. But the multinationals which have set up industry in China, will face huge losses in other global markets as a result of this devaluation. This will ultimately result in capital outflow, which will come back to haunt China.
Regardless of China’s reasons, it now presents every other country with a decision: how to respond? Other countries have suddenly become less competitive against China and stand to suffer. Other developing economies have suffered, since they will lose multinational business houses to China. For the US, on one hand it strengthens their currency, which still serves as a benchmark for global trade due to its stability. On the other hand, it would make US bonds cheaper, since China in the last few years has bought large number of US government bonds.
The risks are real, but so are the potential benefits. China made its decision, as every country does, based on its own interests. In this case, however, no one benefits from slow Chinese growth, and everyone could benefit from faster growth. Despite short-term profits, this could end up being a fiasco over time. Only time will tell, how this affects the Chinese and the other global economies. Will it benefit China, as they expect it should? Or will it one of the biggest economic miscalculations of this decade?
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