Chinese Investors and Devaluation
Devaluation is the lowering of the value of a country’s domestic currency as compared to another currency. Devaluation is a relative concept, as the Yuan may be devalued as compared to the US Dollar, but not necessarily as to the Australian Dollar.
The Yuan that has been devalued would now cost cheaper versus the US Dollar for instance. When an American dollar was worth 5 Yuans before hypothetically, it would be now worth 10 Yuans, depending on the degree of devaluation. Thus, to purchase American goods, more Yuan would be required.
This would ultimately affect Chinese investors especially those who are dependent on raw materials sourced from foreign countries. There would be an incidental increase in cost of the imported material as a result of the devaluation. Thus, the cost of manufacturing a product would be higher, compressing margins for the Chinese producer. In turn, the increase in cost may be passed to the consumers, resulting to an increase in price, an inflation. In effect, the purchasing power of their disposable income would also be lower.
On one hand, those Chinese exporters totally independent from foreign raw materials may be able to attract more foreign buyers.The reason is that, due to the devaluation, the Yuan now costs less, thus the Chinese good being sold abroad would also be equivalent to less foreign currency. Sensing a comparative advantage in the cost of Chinese exports, foreign buyers would now prefer importing Chinese goods to their country.
Foreign Investors and Devaluation
While Chinese investors may or may not profit from devaluation, based on their raw material or production component, foreign investors are likely to have a windfall on the devaluation. The positive impact will be most felt by foreigners who hold foreign currency. Instead of exchanging one unit for a unit of Yuan, the equivalent exchange rate would now increase to one unit for more units of Yuan. Thus, foreign investors will experience an increase in their purchasing power.
Corollary to the experience of Chinese exporters, foreign investors would be more lured to investing in China because of the relatively cheaper cost of production. Since devaluation would provide them with more Yuan per unit of currency, they may opt to thus purchase from China, or perhaps relocate the business in the Mainland.
References
Inman, P. (2015). Why has China devalued its currency and what impact will it have? Retrieved March 02, 2016, from http://www.theguardian.com/business/2015/aug/11/china-devalues-yuan-against-us-dollar-explainer
Don't cheer a devaluation. (2016). Retrieved March 02, 2016, from http://www.economist.com/blogs/buttonwood/2016/02/currencies-and-economics
