Devaluation And Revaluation. The effect of the devaluation on the real economy (Chinese Economy)

Devaluation And Revaluation
Aspects.

Practical cases.

The effect of the devaluation on the real economy.

Within the framework of the Economy spoken of pure and natural from revaluation and devaluation terms, these definitions are valid in theoretical terms, however, is different compare these assumptions with economic reality. This is the case of powerful economies such as United States, Germany and England, but, well, it's also wise now naming countries large such as China, an oriental country that is moving giant steps in economics, international reputation and productivity .

According to an article in the February 21, 2015, the famous magazine "The Economist" explains some events in currencies and behaviors of the Chinese currency "Yuan" and other influential within the processes of evaluation and weighting of the purchasing value of the currency .

In the article, the author explains how Chinese officials are out to defend its exchange rate policy at least can appreciate the irony in the latest charges against them.

The yuan has been one of the best performers in the world this year. The reason is simple. Although China says it is trying to manage the yuan's value against a basket of currencies, in practice it is still loosely pegged to the dollar. As the dollar has risen against most currencies in the last seven months, the yuan has hitched a ride. The dollar is up 18% since July against seven most actively traded currencies in the world, but only 0.6% against the yuan (see table). As a result, the Chinese currency is at its highest point in trade-weighted terms.

For some years, foreigners accused of keeping artificially weak yuan to boost exports. Now, analysts say internally, they are doing the opposite: keep the artificially strong currency and, in the process, hurting the economy. Some predict that China will soon change course and design a devaluation. But like the Chinese authorities do not resort to a greater appreciation of once, when the yuan seemed too weak, it is unlikely to embark on a dramatic devaluation now that is strong.

That forecast devaluation believes the state of the economy does not justify such a force. More than $ 90 billion (almost 3% of quarterly GDP) flowed out of China through its capital account in the fourth quarter, a record deficit. The central bank sold a small portion of its foreign exchange reserves almost $ 4 trillion, while implying that intervened to prop up the yuan.

Devaluation, all else being equal, let the Chinese exporters regain some lost competitiveness. By raising the cost of imports, but also it helps China to avoid deflation. With monetary easing from Japan to Europe creating several coins for the biggest declines, it is fair to ask whether China can afford to sit on the bench.

However, the depreciation costs outweigh the benefits for China, for two reasons. First, it is doubtful that deliver the desired economic result. Despite talk of currency wars, Asian countries have so far avoided large-scale fighting on their exchange rates. If the largest economy in the region launched an offensive, others will surely follow, eliminating any advantage they expect to win. In fact, a devaluation could affect the economy. One yuan could fall to encourage capital outflows. Undoubtedly endanger China's enterprises, which have accumulated $ 1 billion in foreign debt, which would become more expensive for the service if the yuan lost ground.

Second, the policy of devaluation would hurt China. In the short term, it would not be renewed complaints in America on Chinese currency manipulation, raising the possibility of countermeasures. In the longer term, it would hamper the efforts of China to make the yuan a rival to the dollar. Stronger currencies reserves serve as safe havens when others are in crisis. During the Asian financial crisis of 1997-98 and the global crisis of 2008, China maintained a stable exchange rate against the dollar, despite having a large cause to allow depreciation. Such actions have reinforced the credibility of the yuan. A race to devalue now would weaken.

That said, some weakening of the yuan is likely in the coming months. The central bank has long promised to give the market a greater influence on the exchange rate. With the current and capital account surplus narrowing flowing out, the market is targeting at least slight depreciation.

The central bank has also pledged to make the exchange rate more volatile, the speculators wrong feet and force companies to do a better job of covering its exposure to currencies.

Guan Tao, an official regulator exchange rate (Pretty influential compared with brokers and influential type of Colombians change), issued a warning as this month, quoting an old proverb. "A wise man should not be next a dangerous wall "relentless rise of the dollar can dislodge a brick or two, but China is not about to let the yuan collapse.

References

SHANGHAI , Feb 21st (2015),From the print edition, The Economist.
Web edition: http://www.economist.com/news/finance-and-economics/21644205-devaluing-yuan-would-do-china-more-harm-good-currency-peace