Chinese Government Devalues Currency to Revive Manufacturing and Exports

Published Date : Aug 19, 2015

In the past few months, the Chinese government has faced a single and major worry – saving the troubled economy. Last month, when the stock market stumbled and money flew out of the system, the country’s exports took the hit. The Cabinet understood that it was imperative to fix the export problem and what could be better option than to decrease the value of the renminbi. When the government kept a tight control over the value of the Chinese currency, the goods became more expensive and the Chinese exporters could not compete with their rivals. This made the Communist Party to call for currency devaluation last week which led to the biggest dip in the value of renminbi since 1994. 

Though devaluing the currency would take care of the present export scenario, it would affect China’s global ambitions in the long run. Chinese authorities have been pushing for big expansion of overseas investment. Decreasing value of currency would take away the country’s buying power overseas up to some extent. However, for the time being, China does not seem to mind it. Manufacturing sector, the core engine behind the country’s growth as the world’s second-largest economy, has been critical in the recent times. With exports dipping down to 8% last month compared to that of a year earlier, the pressure has been mounting to revive the manufacturing sector. 

Last week, the central bank in China announced a new policy for determining the value of renminbi. The policy would let the market forces to play a larger role in determining the currency value. Though the bank has denied that the step was taken to take care of the exports and manufacturing sector, experts have pointed out that the quick economic benefits are the main reasons behind the step.