We have recently heard of the yuan devaluation. What exactly is it and why would a country devaluate its own currency?Frequently asked inWe have recently heard of the yuan devaluation. What exactly is it and why would a country devaluate its own currency?

Update://TCancelUpdateBIU@

Update://TDrop an image hereDrag an image here, or...Top of Form

Bottom of FormCancelUpdateUpdateCancelRe-AskUnfollow4CommentFacebookTwitterMoreShareDownvoteMake AnonymousAdd to Reading ListAnswer LaterNotify About EditsAsk to AnswerEdit Question & DetailsCreate Answer WikiSet Context TopicMerge QuestionsReport QuestionYou followed thisWe'll notify you about the best new answers. You can also help Quora find someone to answer:Ask to Answer

Update://TCommentAnswer Wiki is A community edited wiki. Review guidelines before editing.BIUH@

Update://TDrop an image hereDrag an image here, or...Top of Form

Bottom of FormCancelUpdateWe have recently heard of the yuan devaluation. What exactly is it and why would a country devaluate its own currency?

Mayank KakkarEdit Bio Make AnonymousBIUH@Your answer needs editing to be more helpfulProvide more explanation why the answer is correctAdd a bio that shows experience or expertise in the topicInclude links to relevant sourcesUse correct spelling and grammar and clear formattingLearn more about what a helpful answer looks likeWrite your answer, or answer later

Update://TDrop an image hereDrag an image here, or...Top of Form

Bottom of FormQuora only supports English for now. Please write in English only.SubmitAnswer LaterSave DraftPost to:My @Quora answer to We have recently heard of the yuan devaluation. What exactly is it and why would a country deval

Don't Show to My Followers4 Answers

Ashish BhatnagarJack of several trades, master of some! :)Follow34Ashish Bhatnagar, Economics lover!Sorry for the lengthy answer in advance, but thats what happens when I answer an economics related question that has another question merged into it.What is Devaluation?Devaluation is when value of a currency against another currency (which is used as a standard) has fallen. Dollar is the worldwide standard (or reserve) currency as of now. When we hear that Yuan has devaluated, it means its value against dollar has fallen.

In general, values of currencies are determined according to market. Most countries across the globe follow this pattern and allow global economics to determine the price of their currencies. So any major global economic event (i.e. devaluation of a currency) affects the prices of almost all currencies. This is called leaving currency valuation over global market. An example is our country India. Value of Indian Rupee fluctuates in accordance with global economic events. This is why INR also fell against dollar when China devaluated its currency. If you want to understand this in detail, you can read another answer that I wrote recently: Ashish Bhatnagar's answer to How does the yuan devaluation affect the rupee?

But Chinese governement has almost everything in its hand. As you mightve heard already, theres no democracy in China. How can a country that doesnt ever allow its own people to make decision about the government can allow market forces to determine the value of its currency?

So in China, the value of Yuan is completely in hands of government. They can adjust the value of their currency according to their own needs whenever they feel the need of doing so, which gives a totally unfair advantage to their exporters (as youll learn in a minute). Thats why USA has also been saying from a long time that China should allow the market to determine the price of its currency.Suppose there are 2 countries in the world: Bongoland and Domboland. Their respective currencies are Bongos and Dombos. Now, Bongoland is a richer country so its currency has earned the reserve status. The exchange rate looks something like this:

1 Bongo = 2 Dombos

Now all of a sudden, some day, government of Domboland decides to devaluate its currency Dombo. After devaluation new exchange rate becomes:

1 Bongo = 3 DombosIn real world, Bongoland = USA and Domboland = China

Thats how devaluation happens and how China devaluated its currency.Now coming to your second question:Why would a country devaluate its own currency?Now lets add one more country to the example given above: Tromboland. Its currency is Trombo. The exchange rate of Trombos looks something like this:

1 Bongo = 2 Dombos = 6 Trombos

Now lets assume that Trombolands Cental Bank didnt allow its currency to slip along with Dombos according to market price. So after devaluation new exchange rate looked something like this:

1 Bongo = 3 Dombos = 6 Trombos

Now lets proceed with the example to understand why and when a country devaluates its currency.Why did Domboland devaluate its currency? Had it gone nuts? Lets time-travel to past to understand why did it do so.

Actually Domboland is a production powerhouse. Its industries have reached a level of scale thats much bigger than the scale of another country Tromboland. It exports a lot more than it imports. One commodity that it produces heavily is cotton. After satisfying the local demand, it exports remaining cotton to Bongoland.

While scaling the industry is very important for earning truckloads of money, once a country has maximized the scale it faces two particular problems:Sometimes there may be excessive production;And theres a limit to how much you can scale. Once you reach that limit, you cant keep scaling while keeping your year-to-year growth rate intact.Since Domboland is a production powerhouse and its economies have scaled widely, this year theres a surplus production of 50 cotton packets in the country. That means, after satisfying the local demand and exporting to Domboland therell still be at least 50 packets of cotton that Domboland wont be able to sell. Problem no. 1!

Plus, it has reached a level of scale in cotton production from where it cant keep its growth rate intact. It has already utilized the maximum amount of human and natural resources it had. Its growth rate in cotton production is declining from last few years. Outside investors who had earlier invested heavily in Dombolands cotton production companies by seeing their impressive growth rate are now thinking of selling the stock they hold in those cotton production companies which will lead to a massive outflow of money. Problem no. 2!

Due to these two problems, government of Domboland is panic-seized.

Whats the solution? Theres one solution that they can apply.

It turns out that Bongoland purchases only 50% of its entire cotton demand from Domboland. Remaining 50% it purchases from Tromboland because it doesnt want to rely on one country only. It means:Bongoland purchases 50 packets of cotton, each worth 2 Dombos from Domboland (100 Dombos worth of cotton)And it purchases another 50 packets of cotton, each worth 5 Trombos from Tromboland (250 Trombos worth of cotton)(since Tromboland isnt a production powerhouse of cotton like Domboland, its price per packet of cotton is slightly higher in local currency than what Domboland charges for cotton in its own country. Tromboland cant sell cotton for 2 Trombos like Domboland does for 2 Dombos)

In local currency of Bongoland, its importing cotton worth 50 Bongos from Domboland (100/2)

And cotton worth 41 Bongos from Tromboland (250/6)

So as a solution to fix both problems that Domboland is facing... its government decided to devaluate Dombos against Bongos. After devaluation, new exchange rate became:

1 Bongo = 3 Dombos = 6 Trombos (Tromboland didnt allow its currency to devaluate accordingly with market)

Now after devaluation when Domboland sends its 50 packets of cotton worth 100 Dombos... all of a sudden they become cheaper for Bongoland, thanks to devaluation of Dombos. According to new exchange rate:100 Dombos = 100/3 = 33 Bongos

So Domboland will receive 33 Bongos for the consignment of 50 packets (before devaluation it wouldve received 50 Bongos)

Now another consignment of 50 packets arrives from Tromboland. Since Tromboland didnt devaluate its currency, their packets will still cost 41 Bongos to Bongoland.

Wait... just a while ago Bongoland received another consignment of 50 packets from Domboland for 33 Bongos only... so if it can purchase 50 packets for 33 Bongos... why would it pay 8 Bongos more to Tromboland?

So it orders another consignment of 50 packets from Domboland... and since theres a surplus production of 50 packets, theyre already in a position of exporting the required 50 packets to Bongoland. So they do it and Bongoland refuses to pay for the consignment that arrived from Tromboland and the consignment goes back to Tromboland exporters.

So this way... by devaluating its currency, Domboland easily sold the surplus production it had to Bongoland. Plus, now it can also show the growth to outside investors with a proud statement: Aside from satisfying the demand within our own country, now we also satisfy the 100% demand of Bongoland.

At the cost of Trombolands exporters. Domboland definitely hadn't gone nuts.

What would Tromboland have done to save its exporters from getting their consignments returned?

It wouldve allowed its currencys value to adjust according to market (in other words, itd have allowed its currency to devaluate along with Dombolands currency)

At present China is also playing the same game. And RBI is also doing what I just told in the example to save Indian exporters allowing INR to slip along with Chinese Yuan.

As of now production is not a problem for China its producing in HUGE quantities. The problem is slowdown of its economy. Chinese ecnomny is on a steady decline after rising in double-digit figures of 10% or more for decades. Growth rate of China hit an all-time low of 7.4% in 2014.Source: China Economic Growth Is Slowest in Decades

Why their economy is declining is not the topic of this question, so Im not going into its detail. If youre interested in finding out more about it, please post a separate question and ask me to answer it.

So outside investors who have invested as much as 50% of Chinas GDP in the country are extremely worried now. Anytime they may pull money out of China in huge quantities.

So what China is doing at this time is shooting at same two targets from single bullet of devaluation its increasing its export as Domboland did in the example given above, and its showing the signs of growth to outside investors.

Thats why China devaluated its currency.96 views Written 7am(more)Upvote0DownvoteCommentFacebookTwitterEmbedMoreShareAdd to Reading ListSuggest EditsThankReport BioReport Answer

Update://TComment

Ramamurthy Guruvayurappan, a thousand followersRamamurthy has 680+ answers in Economics.Most of the countries follow a floating currency. The market forces determine the value of the currency on a day-to- basis, with demand and supply acting on it, with adjustments on the happenings of the economy relflecting on its vale. The central bank of the country in such cases dont ordinarily interfere with the value of the currency. The depreciation ( it is nothing but devaluation) or appreciation in the currency happens on a daily basis.

China manages its economic development with a fixed currency. China fixes the parity rate at which market transactions take place. So they maintain their rate irrespective of whether their reserves increase or decrease. The devaluation is one of the important tools with the central bank of the country, where currency is a fixed one. They are perforce required to refix it in line with the market forces. China has devaluation with various considerations in mind, in one stroke. It can be to prop up exports, to make exports more competitive, to feed their growth engine of manufacturing. Such a fixed rate could have resulted in huge outflow of funds from the chinese economy, fearing slowdown. It may be done keeping that in mind to avoid further outflow and if possible to attract further inflows. China has ambitions to position its curency as an alternative reserve currency in the global markets. In line with this thinking, china has moved its reference rate closer to the market determined rate, which has resulted in devaluation of about 3 to 4 percent.196 views 2 upvotes Written Sat Asked to answer by Rashi Gupta(more)Upvote2DownvoteCommentFacebookTwitterEmbedMoreShareAdd to Reading ListSuggest EditsThankReport BioReport Answer

Suyog Narvekar, CA final student, cs final student, student of LLB also completed 3 years of ...As you must already know china is a manufacturing economy. Almost everything we buy is made in china these days. So basically the Chinese are dependent on this industry in a large way.Now what happens to all these manufactured goods? China exports it to various countries,Europe being one of the biggest market.Now due to various reasons one of the major being the Greece meltdown and the slowdown of Europe led to a slump in exports for Chinese products (did you know? China has a train that starts in china and ends in Paris, the longest railway line in the world just to carry goods for export)

So now we know we had a slow down in Chinese exports. One other reason was foreign debt china has 282% debt on its gdp (times of India) so if the exports inflow isnt coming in while china still has this mountain debt to pay. Hence the yuan was de valued.Assuming u don't knw what devaluation does. Currency fluctuates with the market like the rupee to dollar rate. Say today $1=65 this is the market rate. And tomorrow the govt decides to devalue therupee lets say to $1=70. If I am an exporter selling 1 ton of steel at $10000 so before the rupee got devaluated I used to get 650000 and now for the same quantity of steel I get 700000 a profit of 50000 just because the government devalues the rupee! The best part is that the steel isn't expensive its still at $10000 for my vendor.

Devaluation sounds beneficial in the above example but for the economy its a show of weakness and desperation. Besides while it benefits the export it kills the importers, residents going abroad for tourism etc.

So in conclusion china devalued the yuan to strengthen its exports.16 views Written Sat Asked to answer by Rashi Gupta(more)Upvote0DownvoteCommentFacebookTwitterEmbedMoreShareAdd to Reading ListSuggest EditsThankReport BioReport Answer

Rohan DeepSee the basic motive behind devaluing one's own currency is to encourage exports of the home country. Yuan which is working under the fixed exchange rate regime was under a crawling peg where a currency is allowed to move in a certain band which is 2% for Chinese Yuan. To improve the trade surplus is the ultimate objective of china at current levels being an export oriented economy china wants to improve the health of the economy which at current times is not going through a good phase. If Chinese yuan is devaluated then the exports would become cheaper which would change the dynamics of trade for other countries especially the one who imports a lot to china.