China has been playing an important role in the global economy and in the short term future the country is going to continue to build up its international presence. However, keeping up the economic growth may become a serious problem for the Chinese government in the short term. The rates of economic growth have declined in the past years and this is a very big risk for the developing economy that China has.
So now China is looking for the ways how to improve the current situation. Stimulation of exports by means of the weaker national currency is one of the approaches (Talley). In August 2015 Chinese government decided to devalue the national currency. In Figure 1 one can see how it can be achieved – either by means of decreased demand of Yuan or increased supply of Yuan.
Figure 1 Demand and supply of Yuan after depreciation
For the world community such a measure was a surprise and now there are many analysts who think that it is either a sign of the economic slowdown or an intentional move to liberalize Chinese economy and make it more attractive for the international investors (Talley). The weaker currency will help Chinese companies to sell more products abroad, because the production costs will be low again.
Moreover, the weaker currency may attract the foreign investors to China. The USA has expected this move for many years. China will be more market-oriented and Chinese government will limit currency intervention in the future. However, now they have to be careful, because too much devaluation will lead to the flight of capital and may result in the economic crisis (Talley).
The dynamics of the CNY-USD exchange rate was very stable in comparison with the other currencies. After several years of appreciation the Chinese currency began to depreciate and the last sharp change occurred in August 2015. Though the new policy has brought some benefits other than stimulation of export. China’s imports will become more expensive and consequently Chinese companies will have an advantage in the domestic market. In Figure 2 one can see that the fall in imports spending and rise in export revenues will improve the aggregate demand and the balance of payments.
Figure 2 Effect of reduction in the exchange rate
Moreover, China will be trusted more in the international organizations such as IMF. For many years China was trying to persuade IMF to include Chinese currency in the basket of reserve currencies. Now this is possible, because IMF required from the Chinese government to change their currency policies and let Yuan freely fluctuate in relation to the other currencies (Talley, 2015). If IMF decides to agree to include Chinese currency in the basket of reserve currencies, the demand for the Chinese currency will gradually grow in the world. But now the countries are worried about the economic news that have been coming from China and expect that Chinese government will be more predictable and stable than now.
In conclusion, China has become dependent on the international trade and letting Yuan to be more flexible is the right step in the direction of closer cooperation with the foreign organizations and key trading partners. China’s export will depend more on the fluctuations of the currency rate and it will be fairer to the other countries. The decision to weaken Yuan will help China to compete against the other countries in Asia, because China will receive the competitive advantage. In the past years Yuan depended too much on the U.S. dollar which appreciated a lot. As the result the Chinese Yuan also appreciated in relation to the other currencies and the Chinese products became more expensive. By taking a decision not to control Yuan as much as before China showed that it is willing to cooperate with the other countries and is ready to implement the reforms that will make Chinese economy more accessible and open to the foreign investors. Chinese economic growth and exports growth have been declining, and Chinese government needs to focus more on the domestic market and increase of the well-being of the citizens in order not to depend too much on the exports of goods.
Works Cited
Talley, Ian. “Devaluation Strengthens China’s Hand at IMF”. The Wall Street Journal. 2
September 2015. Web. 11 February 2016
