After a central bank devaluation last week, China’s yuan fell to a four year low. This has sparked fears of a currency war brimming, as other countries also feel the pressure to devalue their currencies. Financial markets have been on edge since the devaluation, bringing China’s economic strength into question.
Financial experts have seen the move to devaluation as a benefit to China, allowing potential export growth given its recent slump in exports this past year. Yet, others argue that despite the stimulation to China’s declining export industry, a much bigger devaluation would be needed to have a meaningful effect on China’s large economy. Furthermore, a weaker yuan would lead to a rise in the cost of imports, which could result in the fall of stocks and further harm the economy. Therefore, the collateral effect of the devaluation seems to outweigh any substantial benefit it would have to China’s exporters.
China’s central bank, the People’s Bank of China, has reassured markets that the devaluation will not be a recurring trend. Yet, the impact of the devaluation on the United States is apparent. A weaker yuan means a stronger dollar, which in turn would hurt U.S. manufacturers exporting to China, as American goods become more expensive.
Therefore, the impact on trade is apparent. The close link between the yuan and the dollar has a significant effect on trade between these two countries. Importers and exporters should continue to monitor the yuan, although it is unexpected that a devaluation as significant as this one is to occur again systematically.
Yasmin Aljarki is a part of the project support team at the Global Research Institute of International Trade. She has earned her Bachelor of Law at University College London and a Master of Law at the University of Southern California. Yasmin is now transitioning to the world of business and international trade, whilst earning a postgraduate certificate in International Trade & Commerce at UCLA. To learn more about Ms. Aljarki, please click here.