HOW CHINA UNDERVALUATING POLICY AFFECT GLOBAL ECONOMY

HOW CHINA UNDERVALUATING POLICY AFFECT GLOBAL ECONOMY

        The devaluations of the Chinese currency reflect imbalances of the economy of the Asian country that are noticed for a long time and increase the installed preoccupations already in the global economy.

From the 11 of August the Popular Bank of China (PBC, central bank) modified its system of determination of exchange rate, happening of a system based on the estimation of the supply and demand of currencies of the actors from the foreign trade to another one in which also it takes into account the transactions from the interbank market and the quotes from other currencies. According to the authorities the change of system gave rise to an exchange skid induced by “the forces of the market”.

The result is that the quote of the Yuan-renminbi (RMB) in relation to the dollar backed down at its level of 2011.

In order to evaluate the depth of the devaluation it is necessary to consider that in the last two years the dollar was valorized in relation to the Euro, the yen and the pound sterling while a stable parity with the Yuan-renminbi stayed.

Another vision on the devolutionary decision is that the Chinese government tries to stimulate his exports and the associated economic activity to the same.

In the last months exports of China showed weakness signs (in July a 8% in relation to the same month of the last year fell, a fall that duplicate the hoped one by the authorities), which affects the economic growth.

In spite of the exporting weakening China it has a strong commercial surplus, but its current account (that includes exports and imports of services) has let be itself positive to be in balance and until with a slight deficit due to the increase of the expenses of services, especially by tourism.

On the other hand, the capital account also has a neutral and negative balance between because the exits of capital by investments of Chinese companies in the outer one already surpass the income of foreign investment.

The devaluation of the RMB in relation to other industrial countries not only modifies the trade relations. Also it lowers the price of Chinese manpower in relation to the one of the external investors (Taiwan, Japan, EE.UU., South Korea) partially reverting the relative increase that Chinese manpower was in the last years old.

In this same sense it reduces the incentives of the Chinese businessmen and other origins to redirect its investments from China towards other Asian countries of cheaper manpower like Vietnam or Myanmar. And perhaps also towards other destinies since the cost of Chinese manpower would have been compared even to the effective one in Mexico.

Concluding that one of the segments of market affected by the devaluation of the RMB was the one of raw materials, whose market was in loss by the weakening of the Chinese demand, in a context of loss or null recovery of the industrialized economies that contribute the world-wide demand most of.

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