Monetary reforms: devaluation of Chinese yuan and its consequences | Статья в журнале «Молодой ученый»

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Рубрика: Экономика и управление

Опубликовано в Молодой учёный №6 (110) март-2 2016 г.

Дата публикации: 18.03.2016

Статья просмотрена: 17 раз

Библиографическое описание:

Мирзаев М. А., Мирзаев Ш. Б. Monetary reforms: devaluation of Chinese yuan and its consequences // Молодой ученый. — 2016. — №6. — С. 508-511. — URL (дата обращения: 27.05.2018).

As we know, money supply, or money stock, is the total amount of money in circulation or in existence in a country at a given time. Money supply impacts the price levels, capital availability, inflation, and the overall business and economic cycle of a country. High money supply leads to more spending power and lower interest rates, which makes more capital available for investments, businesses and spending. The reverse occurs with low money supply. Government authorities closely observe money supply figures and take necessary actions suitable for the overall economy, or for selected sectors. Almost all countries in the world control their respective money supplies through their central banks. For example, The Federal Reserve Bank (FRB) in the U. S. and the People’s Bank of China (PBOC) in China control their nation’s money supply. The second largest and the fastest growing economy of the world, China has a unique socialist open-market economy. It is tightly controlled by the government, yet remains open to free market forces. China’s trade performance promotes the yuan’s use in investment and the government is doing its best to capitalize on this trend by nurturing China’s financial markets. Among other steps, officials have relaxed controls on foreign institutional investors buying Chinese securities, eased restrictions on interest rates and the exchange rate, allowed capital to flow freely into and out of the just-launched Shanghai Free Trade Zone and are trying to develop China’s money and bond markets. In the last 8 years, the Chinese yuan exchange rate to the U. S. dollar has remained in the stable range of 6.1 to 6.8. [1]

The relationship between currency and economy in China is an interesting proposition, as its export-dependent economic system works differently from that of other countries. The last 10 years has seen massive changes, the most remarkable being the opening up of the Chinese economy. Major reforms have increased its market orientation. This period has seen the major monetization of a variety of resources, and their availability to the open market, which attracted large-scale investments from foreign investors. Those resources included manufactured goods, infrastructure, technology, and natural resources, as well as human capital and labor. It lead to an increase in demand for the Chinese currency, which required more lending from commercial banks, and finally increased the money supply. As can be seen from the above graph, the money supply was increased significantly over last 8 years. Amid high and consistent growth rate, China managed the increasing money supply quite well while keeping the currency rates stable. Printing national currency is another measure applied by China. The PBOC can print yuan as needed, though this can lead to high inflation. However, China has tight state-dominated controls on its economy, which enables it to control inflation differently than in other countries. Changes are made to subsidies and other price-control measures to check inflation in China.

But in some cases a country needs to change its monetary policy according to changes in its economy. Money reform is can be taken place in the country in order to be strengthened and regulated the country's monetary system by state. Monetary reform describes any movement or theory that proposes a system of supplying money and financing the economy that is different from the current system. Just in August, 2015 the People’s Bank of China (PBOC) surprised markets with three consecutive devaluations (devaluation — the value of the national currency is lower than foreign currency) of the yuan, knocking over 3 % off its value. Since 2005, China’s currency has appreciated 33 % against the US dollar and the first devaluation on August 11 marked the largest single drop in 20 years. While the move was unexpected and believed by many to be a desperate attempt by China to boost exports in support of an economy that is growing at its slowest rate in a quarter century, the PBOC claims that the devaluation is all part of its reforms to move towards a more market-oriented economy. The relative size of the devaluation appears to be in line with market fundamentals and thus, at least for now, the PBOC’s claims can be believed [2]. But this can lead to develop another field of China’s economy, it is export. Devaluation stimulates exports and the country will be able to eliminate the difference between the exchange rate of the national currency and parity. In its statement, the PBOC said it wants to bring the yuan more in line with the market. But the move also comes as China’s important export sector has weakened — and overall economic growth looks sluggish. Over the weekend, Chinese customs officials said July exports fell 8.3 % compared with a year ago. A weaker currency helps China’s exporters sell their goods abroad. The IMF re-evaluates the currency composition of its SDR basket every five years, the last time being in 2010. At that time the yuan was rejected on the basis that it was not “freely usable,” but the devaluation, supported by the claim that it was done in the name of market-oriented reforms is being welcomed by the IMF as it gets set to consider the yuan’s inclusion. But despite this welcomed response, the IMF has stressed that China will still have to do more and be willing to progress towards a “freely floating exchange rate. The most immediate effect is that it signals to the world that Beijing thinks the Chinese economy is sputtering. The move suggests China is looking for ways to get it going again. But it also has major implications for the U. S. and other countries that trade with China because it puts their companies at a disadvantage. In the U. S., it will likely reignite criticism that Beijing keeps the currency artificially low to help its own manufacturers — a charge that could get added impetus during the presidential election campaign [3]. The move puts pressure on other central banks around the world to push down their own currencies to help their own exporters and to prevent destabilizing capital flows. The move could hurt commodities markets because it signals potential weak demand from China. It could also accelerate capital outflows out of China, especially if investors expect further devaluations. And there are another following affects: it is bad for commodities—and good for commodity buyers, the falling yuan may force other countries to devalue their currencies (currencies of Australia, Malaysia and South Korea fell in tandem after China's move. But an analysis by Morgan Stanley in March predicted that a 15 percent drop in the yuan, much larger than today's move, would cause a 5 percent to 7 percent drop in other Asian currencies), China's real goal may be prestige—and some longer-term stability.

Michael Every, Rabobank's Head of Markets Research, Asia-Pacific, said once Beijing had won the diplomatic triumph of getting the yuan included in the International Monetary Fund's reserve currency basket in November, he expected policymakers would let it slip to cope with a slowing, deflationary economy. «Why people are panicked is because they didn't see this coming, and/or the global economy needs a consumer of last resort, and China is sending a signal that they won't be it», he added [4]. A sustained depreciation in the yuan puts pressure on other Asian countries to weaken their currencies and makes commodities denominated in U. S. dollars more expensive for Chinese buyers, which could further depress demand and commodity prices.

We can see results and or predictions of the devaluation. The weaker outlook comes after the yuan reached its lowest level against the dollar in five years on Thursday, following repeated devaluations by the People’s Bank of China this week. Chinese policy makers have pushed the currency lower to try and help boost the competitiveness of the country’s exporters. But the moved unleashed turmoil in both local and international stock markets by raising concerns that China’s economy was weakening too quickly. Another is result that, China is in the throes of a major shift in the balance of power between labour and capital, and are attempting to transform its producers into consumers — a grand transition from world’s supply side workshop to its next great marketplace. There some factors of China`s economy which may be in trouble: the data is «sketchy» on the amount of Chinese corporate debt, or which companies or sectors hold it, but market movements indicate that information technology, real estate development, and the financial sector are the most heavily exposed. Some companies have even taken on dollar debt despite working with global commodities (which are largely priced in the U. S. currency), effectively «doubling down» on their risk for yuan depreciation. That includes large manufacturers that buy metals on the international markets [5].

And what about nowadays? China weakened the value of its yuan currency by 0.51 percent to 6.5646 against the US dollar on January 7, figures from the China Foreign Exchange Trade System showed. The problem is that most outside traders consider the yuan to be more than 10 percent overvalued against the U. S. dollar. Allowing the market to take the exchange rate to that value could potentially devastate China's domestic economy, but it's an expensive — and potentially impossible — task to fight the market now that the yuan is a global currency. While the country's leadership had hoped to offer some amount of currency reform while still maintaining stability, it's finding the process hard to control, according to Jonathan Fenby, China director at Trusted Sources. «Once you start to do it, you can't be half pregnant», he said of the currency liberalization process, one that likely began as a politics-inspired goal of having the yuan included in the International Monetary Fund's Special Drawing Rights basket of important reserve currencies. Beijing has long pressed the IMF to make the yuan part of the select club of currencies, along with the U. S. dollar, the euro, the yen and British pound sterling. The addition is scheduled to take effect this year «They're riding a bronco that they didn't quite know they were unleashing», Fenby said, pointing to the risks to Chinese political stability if its middle class were significantly affected by a yuan-influenced global downturn. Fenby suggested that the PBOC's plan for several months has been a gradual deprecation, but it has struggled to enact that course in the face of intense global scrutiny. «They thought: When the market is not looking at you, when other currencies were in the firing line, then you devalue a little, and use the reserves (to stabilize that move)», he said. «But the control mechanism has been weakened much further, and there's been a buildup of sentiment in the market that the currency should go down further». [6].

However, the market players also said that the yuan’s weakness could potentially boost China’s overall exports eventually. Not for long time Chinese yuan has been accepted as one of world`s reserve currency. But it leads to decreasing general weight of yuan in the country and in the world trade. Chinese economy is much strong, it could provide the currency with its power, however, can yuan be a world`s sole reserve currency. This is quite a relevant question, as the became the global reserve currency at some point. Advantages accrue to the nation holding the global reserve currency, most particularly, that supplies of the currency are «automatically» in demand to facilitate international transactions. The classic example is in the purchase of oil. As purchasers of any product available in the international marketplace need to attain quantities of the global reserve currency to carry out transactions, this substantially increases demand for the currency in question, thus adding to its relative value through the operation of the law of supply and demand. So, for now, the yuan can't became the world's sole reserve currency. Its underevaluation forbid it. But even if China decides to reevaluate hugely the yuan (impossible until a correct interior consumption is developed) it will be necessary to wait decades until the yuan replaces strong currencies such as the dollar and the euro.


Основные термины (генерируются автоматически): PBOC, IMF, FRB, SDR.


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