Question

What are the economic implications of China’s recent history of devaluing the yuan? Specifically, what are the negative implications to major trading partners like Japan and the United States? Are there negative downstream impacts?

Answer 1

The devaluation of Yuan has made exports from China cheaper. Also at the same time because the currency has weakened in terms of other currencies, the prices of imports into China has also increased. This has ultimately led to an increase in the production of goods to substitute for the expensive imports.

Many politicians in the US claimed that China has been keeping the value of their currency very low and this has harmed the American export industry. Basically what happens is that when Chinese currency becomes cheaper, this reduces the price of Chinese commodities. Other countries to remain competitive will also devalue their currency which will further pressurize the US exports.There are major implications for Japan as well because any devaluation of the Yuan will create a major concern for the Japanese economy. Any depreciation of the Yuan against the dollar will lead to an even further depreciation against Yen.