In the past few weeks, several economists and market analysts have been speculating on the possibility that China will devalue its currency to boost economic growth. Earlier this week, this speculation came to reality, as the Chinese officials have decided to devalue the yuan by approximately 1.9 percent—the most aggressive single-day devaluation of the currency since the 90s.
The Asian nation is trying to make it look as if the move to depreciate the yuan is only a one-time deal. However, chances are this is only the beginning and this decision has more to do with the Chinese government’s effort to free its currency rate.
It seems like China has finally faced and accepted the realities of market economics. Even as the country enacts changes in its economic model and implements reforms that will liberalize its financial markets, it still has to recover and revive its competitiveness in terms of exports.
Based on data over the past 5 years, the Chinese yuan is still up by 7 percent against the greenback even after the 1.9-percent devaluation. When you compare the official currency of China to its peers, you will see that it is the only one which rose in value dramatically.
Against the US dollar, the Chinese yuan edged higher by 7%, while the New Taiwan Dollar and South Korean Won barely moved. On the other hand, the Japanese Yen depreciated by a massive 47 percent and Thai Baht shed 11 percent.
The countries mentioned are the closest rivals of China when it comes to exports. The rise in the value of the yuan against the US dollar, even as its competitors devalued, highlights how much competitiveness China has lost to its competitors in Asia. This means that greater depreciation is necessary in order for China’s export engine to regain steam.
The Asian country’s statement regarding the devaluation of the Chinese yuan somehow suggests something similar to an interest-rate cut. Considering the economic importance of exports to China, the depreciation of its official currency is actually much more powerful.
The country is employing the process of currency devaluation purely as monetary stimulus. Hence, China will most probably wait for further deterioration of its economic indicators before going about another round of devaluation.
In my opinion, given the data over the past 5 years, China still has a long way to go in order to keep up with its Asian rivals and global competitors. Perhaps, the Chinese yuan has to devalue by another 3% to 4% before the Dragon will finally rise again from the abyss.