China Devalues Its Currency

The Chinese government has make moves to devalue its currency, the Yuan. Before now, the currency had been a tightly controlled currency and it was more of a surprise to the world at large when the news of the devaluation filtered through.  The devaluation move made by the government is not unconnected to the reduction in trade experienced by the

country. For ten years now, this devaluation is the biggest slump the Chinese currently had experienced. The events of the nearest future will show how beneficial or otherwise this decision by the central bank to devalue the country’s currency is to the Chinese economy.

The Chinese Central Bank however gave its reason for the devaluation; it said there is need to make the state-controlled exchange rate to be more market-oriented. In recent times, there had been lots of growth experienced by the Chinese Yuan. Its growth had been noticeable along with the US dollars.  This had its resultant impact; it had made China exports to be more expensive. This also has the unwanted impact of increase in job loses. Such job loss increase will of course hurt the communist party politically.  Many of the companies producing these export products have in their employments tens of millions of Chinese citizens and any job loss will lead to unwanted outcomes and possible public unrest.

The “managed float” is what is being used by Beijing in its currency system.  With this managed float system, the Yuan’s exchange rate is permitted to float within a range of 2 percent up or down.  The particular rallying point has been set the Bank of China and this rallying point is usually set according to the trading result of the precious day.  This way, the exchange rate of the currency can rise or fall simply in response to demand and supply.  The managed float system however does not allow any swing too wide to the extent of hurting traders.

Other major currencies the world over make use of different currency system. The Euro and the US dollars on their own part are traded freely.  The “anchor currency” is the currency system used by some other countries.  The anchor currency used by most countries is the US dollars.  This system is also able to prevent any excessive swing from the acceptable range that can have hurtful effect on traders. With this suppression in the value of the Yuan, China will be giving exporters from the country some unfair advantages over exporters from other countries and this will have unavoidably hurtful impact on exportation from the countries like the US.

A center point lower than what obtains on Monday was set for Tuesday exchange rate by the People’s Bank of China. The Tuesday center point differs by 1.9% from what obtains on Monday. This center point also turned out to be the lowest ever seen in the country in ten years.  According to the country, the change is part of the reforms proposed for its rate-setting system and this is focused on providing market forces with more roles in the economy.

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