Commentary

Yuan And It’s Continuous Devaluation

yuan

The Chinese Yuan,also known as the Renminbi,weakened further to 6.9168 and heading towards 7. The People’s Bank of China has let the currency weaken as many analysts have now started believing that the currency may touch 7 before the year end.Is it a deliberate attempt to boost their export oriented growth or market forces coming into play ? When it comes to China it is difficult to predict as the Government lacks transparency and financial information is hard to corroborate .China’s Yuan had joined the International Monetary Fund’s reserve currency on 2nd October in it’s recognition as the global economic power.But the continuous erosion can lead to a currency war as other export fueled economy may feel the heat due to the country’s competitive edge.
Being a global economic power and many years of expanding economy ,the Government should also look at the long term effects of the weakening currency from a global perspective.The effect of this weakening currency will also be felt by the manufacturing sector as the cost of procuring raw materials has reached this year High’s and there has been a massive rise in the prices of base metals. This increase in cost of production has partly reduced the effect of currency devaluation.Also the country has seen heavy capital outflows leading to mass exodus of the citizen’s wealth onshore.It can seriously hamper government’s move to steer the economy from the export led growth to domestic consumption driven economy.The lower growth , excessive capacity in key sectors and debt issues of big corporate entities can also be the reason for this depreciation pressure on the Renminbi. We must be careful in this free-for all currency depreciation as there can be fundamental problems plaguing the Chinese economy which may be difficult to detect at this time but may resurface in the near future .
China has certainly grown in might and wields a lot of influence in the world’s political stage but being the 2nd largest economy it has to frame policies suitable and befitting it’s position in the world stage.Meanwhile while the US is going through a transitory phase the newly President elect Donald Trump had mentioned in his campaign that he will formally label China a currency manipulator.We await to see how things pan out but this continuous weakening will certainly hold significance for the world economy and any further development in this regard will be promptly reported by me .

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