This article looks into the reasons for the devaluation of the Chinese currency that is taking place.
The Chinese currency data might be poor, but it has brought in hopes of stimulation. At the same time, the London market has risen sharply and showed the inflation levels to be highest after a year. The poor currency data from China has brought hopes that measures will be incorporated to boost the economy. With these positive sentiments the UK markets have gone up. The overnight data on China’s currency movement shows that the economy has grown about 6.9% as compared to last year, which is one of the lowest levels of growth achieved as compared to the last 25 years.
Traders are taking cues from this sit-upon as they feel that China will now devaluate their currency as well as take on other steps in order to make their growth rate get back to a healthy figure. Here is An Interesting Article on the effect of the same on global currencies – Did Chinese Currency Trigger a Global Currency War?
The decline that has come about in China’s currency recently has brought about turmoil in the stock market of the country. The government even suspended trading on several accounts which reflects the challenge that the country is facing. It needs to figure out its domestic as well as the international economic stance and the obligations it has. The approach that the authorities take will determine the impact on the global economy as well.
The financial crisis that came on a global scale in 2008 led to a disappointing recovery of most of the global economies. This, in turn, brought about a change in the growth model of China. The initial growth model has been based on external demand and investment which then shifted to the domestic demand based model. This kind of a transition structurally cannot be achieved without a decline in the country’s economic growth. The country is now facing a sluggish rate of growth and being a large economy, the solution is not easy to find.
For many years the government has tried to increase the equity owners in the country which has led to more citizens having a larger stake in the companies formed as the country moved to a market based economy. The policies that the country took led to a situation that could not be sustained financially. This led to the possibilities of seeing prices declining as well as dislocation problems.
The challenges in the adjustment in the Chinese economy are showing forth even more now. Chinese companies are not being able to find an adequate market abroad to accept the growing volume of products that they produce. For that reason the production capacity has also stalled, leading to fall in employment growth as well as wages. The government has been unable to maintain the asset prices as well as take control of the credit crisis situations. The currency is being guided to lower levels in order to reduce the adverse effect on the wellbeing of the citizens. The fixes are now on a downhill in order to make Chinese goods appear more attractive in overseas markets while import substitution is being brought back in home markets. It is yet to be seen whether this will lead to problems being solved.