Central Bank of China has decided in favour of depreciation of Chinese Currency Yuan by about 4% in relation to US Dollar in three stages in the first week of August. As per official version it is a move towards greater market determined Exchange Rate System. This version was able to calm the erratic movement of stock markets worldwide. Devaluation of Chinese currency sends signals that “something more noticeable unpleasant” is going to happen in world capitalist crisis.
Trade Weighted Exchange Rate (TWER) of Yuan has appreciated to a great extent since 2005 which in turn made other countries goods/services relatively cheaper when it is compared with goods/services of China. TWER is determined on the basis of assorted currencies vis-a-vis importance of those currencies in relation to China’s foreign trade. This phenomenon becomes catalyst for comparatively higher growth rate for USA and other countries beyond their expectations. China’s growth rate is not hampered due to increase in domestic demand of asset market.
China’s economy now faces slow down due to decrease of demand of its asset market. To give push for higher growth rate, focus is now being shifted towards export. To increase export substantially, depreciation of Yuan is must and that’s why almost after 20 years China has devalued its currency to a great extent.
Repercussion / fallout on World Economy
There is in-depth reaction world-wide. Many countries of the world have been forced to depreciate its currency against US Dollar to counter the Chinese invasion in their respective economy. The Chinese are offering goods and services at lower price than the price prevailing in those countries, and as a resultant effect, is hampering their respective domestic production. To stand in competition with China in Export Market, depreciation of currencies of those countries is inevitable. The governments of those countries have no desire for intervention to protect the value of their respective currencies because they are also desirous for devaluation, to take guard against China’s economic onslaught.
US Dollar has appreciated considerably against other currencies of the world and as a result imports from USA become costlier for other countries and this creates negative impact on domestic activity and employment of USA. Federal Reserve is under pressure to increase rate of interest during the month of September 2015 because the prevailing rate of interest is very very low. If interest rate is hiked then there will be a tendency to hold US Dollar and this will lead to further appreciation of US Dollar against other currencies. The net result will be considerable down slide of economic activities of USA.
China wants larger share in world market by increasing its exports by manifold to cover up the deficiency in their domestic market due to decrease of demand of its asset market. There is now stiff competition among the countries of the world to capture a sizable share in world market (which is also very much stagnant).
No symptom of expansion of world market is noticed and at the same time slowing down of economy of China is not giving any ray of hope for expansion too. Position of USA is already been discussed above. If we consider the entire factors aforesaid in right perspective, we may conclude by saying that RECESSION IS INEVITABLE.
(Contributed By: Dr. Bijay Krishna Bhattacharya. Dr. Bhattacharya is senior faculty of Finance in Globsyn Business School.)