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Artificial Currency weakening by china

Date: 14 August 2019 Tags: World Economy

Issue

 

The United States has designated China as a “currency manipulator” after Chinese Central bank Yuan weakens past US dollars.

 

Background

 

The present devaluation of the currency has gained significance in light of the ongoing trade war between the U.S. and China. Both countries have slapped high tariffs on goods worth billions imported into their countries from the other side.

 

What is Artificial Currency Fixing?

  • Devaluing the currency is a common ploy employed by economies that face a slowdown in order to help boost demand for their goods. 
  • A currency is devalued (or weakened) using the central bank to increase the supply of the currency in the forex market. This allows more units of the currency to be purchased using fewer units of various other foreign currencies. 
  • This is a way of transferring more of the purchasing power to buy Chinese goods away from the hands of the local Chinese and into the hands of Americans. The Chinese believe this will help boost the value of China’s exports and also kick-start growth.

How does it impact global economy?

  • Chinese economy has been witnessing a general slowdown, with growth dropping to a 27-year low of 6.2%. China has decided to depend more heavily on exports as a way to boost demand for its goods.
  • If the U.S. weakens the dollar to retaliate against China’s Yuan devaluation, it will enter a currency war. 
  • This can cause terrible uncertainty for businesses. Combined with high tariffs, this will lead to a steep fall in international trade.
  • Currency devaluation may temporarily boost exports by transferring more purchasing power to the hands of foreign investors, but it will not boost domestic production. Eventually,such competitive devaluations can cause the size of global trade to shrink

Impact on India

  • The result of China’s decision to let the Yuan fall against the dollar, demand for dollars surged around the globe, including in India, investors buy dollars at the expense of the rupee. The Indian currency can plunge into low against the dollar.