China Devaluation of the Yuan

On August 11, 2015,  the People’s Bank of China devalued the yuan 2% against the US dollar.  Over the next two days China again weakened the yuan, bringing the total devaluation to about 3.5%.    It was the largest depreciation in the last 20 years.  It came as a shock to many, as the China yuan has appreciated nearly 33% in the past 10 years.  The devaluation caused the US stock market, and many European and Latin American markets to also decrease in value.  Many wonder if the Chinese market has been performing worse than the government has been projecting, and the devaluation is an attempt to make Chinese exports look more attractive.

Many US politicians have claimed that China has been artificially keeping its currency low over the past few years at the expense of US exporters.  The recent devaluation of the yuan has exasperated that belief, and many believe that China has begun a currency war against the United States by their recent move.  A few days prior, China had experienced a fall in exports, and a common belief is that China wanted to boost their exports, so they devalued their currency.  However, China claims that the competitive advantage the lower value of the yuan gives exporters was not the reason for their devaluation.  Also, experts argue that a 3% devaluation does not give China much of a competitive advantage for exports, it would have to devalue 20-40% to do that.

At a closer examination, the devaluation of the yuan actually did what critics have been calling for in the past few years: allowing the markets to play a bigger role in the currency’s value.  The currency is now set based on the US dollar’s closing price the day before.  Previous to the change, the bank set the value of the yuan regardless of the closing price the day before, sometimes setting it higher than it should have been.  Setting the yuan to reflect the market value helps it establish a stronger currency.

The Chinese yuan is also called the kuai, redback, renminbi or People’s Currency.The all time high for the Chinese Yuan against the US dollar was 8.73 to 1 in 1994, and the low was 1.51 to 1 in 1981. Before the devaluation, it was valued at 6.209 per USD, the fall took it to 6.43, a 4 year low.  Currently, the Chinese yuan trades at about 6.37 to 1 USD.