Devaluation of Forex Currency

Last week, the yuan currency rose in value after Pan Gongsheng, head of the foreign exchange agency, wrote a statement in Qiu Shi magazine that China has no intention to devalue Yuan to boost China's competitiveness in global markets.

Nevertheless, China, as the world's second-largest economy, has a history of frequent currency devaluation over time to boost its country's economic conditions. These allegations are often made by Donald Trump. Ironically, however, from year to year, the US Administration often puts pressure on China to devalue the Yuan with the argument of Yuan's value when it gives China an excessive economic advantage in international trade and keeps the prices of capital and workers within China very low. China's devaluation measures at the end of 2016 as part of emergency measures to rescue its economy have led to allegations that the move is causing uncertainty in the global economic climate.

What, then, is China's impact on devaluation of the Yuan and other countries doing the same?

Increased Export activity



In a global market, the products of a country must compete with similar products from other countries. Car makers in Europe must compete with other automakers in Japan and America. And if the value of the Euro currency drops against the dollar, then the value of Japanese car manufacturers in Japan in dollars will be cheaper than ever. On the other hand, higher currency values ​​make exporting activities more expensive, and will reduce the level of purchases in export target countries.

In other words, exporters become more competitive in the global market when the value of the currency in the exporting country is lower than the export destination country. And with similar conditions, export activities will be very profitable, while import activities will be reduced. However, there are two factors that can thwart the effect; The first: an increase in demand for exported products will make the price of products in the global market increase, thus annulling the effect of currency devaluation. The second: if other countries (especially export destination countries) take similar steps, then there will be conditions in which countries compete to lower the value of their currencies in order to achieve the ideal conditions for export activities. This can lead to undetected inflation.


Minimize Deficit in the Trade Balance



Export value will increase and import value will decrease as export activity becomes cheaper and import activity becomes more expensive. This supports the improvement of the state's cash condition, along with the increase in exports and the decrease in imports there will be a trade deficit in the declining trade balance. The condition of deficit in a fairly consistent trade balance is unusual in the present. However, based on economic theories, countries that are in a deficit in the trade balance will be bad in the long run and can cause high sovereign debt that makes the country's economic activities become obstructed. Thus, a devaluation of the country's local currency can help correct the value of payments in the state treasury and reduce the deficit.

However, there is a negative side of the above thinking. Devaluations also increase the debt burden of foreign debt when using the currency from within the country. This is a quite complicated problematic for developing countries like India or Argentina that have debt in US Dollars and a considerable Euro. Those foreign debts will become more difficult to repay, and then lower the level of confidence in their local currency currency; Which is reflected in the movement of currency values ​​in the forex market.


Relieve State Debt Burden



Incentives for devaluation of local currency values will be seen if a country's government routinely issues government bonds (paid in local currency). If the value of payments / debt repayment is at a fixed level, the weakening value of the currency makes the payment of the debt cheaper than the condition before the devaluation.


Let's take the example of country A who has an obligation to pay $ 1 million each month as interest on debt. If the local currency is devalued in value to only half the initial value, then the interest payment of $ 1 million will only be worth $ 500,000.

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