Why china devalues its currency

However, the U. According to then-U. China's main justification for devaluing the yuan in was the rise of the U. Other reasons included the country's desire to shift toward domestic consumption and a service-based economy.

While fears of further devaluations continued on the international investment scene for another year, they faded as China's economy and foreign exchange reserves strengthened in The negative impact of currency devaluations on relations with the U. International Monetary Fund. Department of the Treasury. Monetary Policy. Fiscal Policy. Actively scan device characteristics for identification.

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Measure content performance. Develop and improve products. List of Partners vendors. Your Money. Personal Finance. Your Practice. Popular Courses. Economy Economics. Part Of. Global Players. Table of Contents Expand. Beijing devalues yuan against US dollar, which will make Chinese goods cheaper after 8. Industrial production, investment and retail sales data for July were weaker than expected, while at the weekend figures showed Chinese exports tumbled 8. After a string of weakening output growth figures going back to last year, the authorities have come intense pressure internally to address the slowdown with a dramatic policy shift.

The dollar has appreciated over the past year in anticipation of the US raising interest rates for the first time since the financial crisis. That has hit Chinese exports badly. That triggered a further fall in the currency markets. The accusation is that the Chinese government devalues its currency in order to make its exports more attractive and gain competitiveness artificially.

The fixed exchange rate regime was reintroduced during the Great Recession; from July to June , the yuan was at a fixed exchange rate of 6. In practice, this dirty float ends up functioning as an exchange rate managed directly by the central bank. The graph shows the movement of the exchange rate in recent years, along with the changes in the exchange rate regime in China.

When a broader timeframe is taken into account, accusations of currency management for devaluation purposes are not very well founded.

Since the fixed exchange rate regime was abandoned in July , the yuan has steadily gained value until However, from to August there has been considerable devaluation. Despite this, the yuan today is still To see the real increase in competitiveness that the exchange rate can provide, we must take into account the real exchange rate.

In this way, for there to be a gain in competitiveness, any depreciation of the currency must not be followed by an increase in internal prices. In spite of this, these gains in competitiveness tend to be transitory and are often associated with other problems.

The way to read the graph is as follows: a value of indicates that the country has not lost or gained competitiveness through the exchange rate compared to the situation in A value greater than implies loss of competitiveness against business partners due to the real exchange rate. A value less than implies a gain in competitiveness against business partners due to the real exchange rate.

As we can see, the Chinese currency has appreciated by almost 39 percent from June to August In the same time period, the US dollar has appreciated by In economics, the trinity is understood as the attempt by the monetary authority to pursue the following three policies simultaneously:. The impossible trinity implies that the monetary authority must dispense with at least one of the three previous points.

Expert: We don't know China's real motivations Mitul Kotecha, senior foreign exchange strategist at Barclays Capital in Singapore, says it's a "revolutionary move" and will allow the market a greater hand in determining the yuan's value. Until Tuesday, the central bank had total control over where the midpoint was set.

From now on, the midpoint will be based on the previous day's closing price. China will also be hoping that the move will help in its quest to get the yuan included in an elite grouping of currencies used by the International Monetary Fund. Why does China keep such a tight grip on its currency? Unlike the dollar, the yuan doesn't trade freely. China still maintains strict controls over its currency and banking system and the flow of money in and out of the country.

If these controls were removed quickly, it would be difficult for China to prevent big swings in the yuan's value.