In August 2015, the People’s Bank of China announced a surprising decision to depreciate the Chinese Yuan by 2% against the U.S. dollar. The central bank said in a statement that “The reform of Chinese Yuan exchange rate formation mechanism will continued to be pushed forward with a market orientation, the market powers will play a bigger role in exchange rate determination to assist the balancing of international payments” (cnn.com 2015).
Why China devalues the Chinese Yuan? Below are the reasons:-
The customs administration’s statistics showed that overseas shipments in July fell by 8.3 percent from a year earlier, the decline is far below the estimate for a 1.5 percent decline in a Bloomberg survey. State media China daily reported that the export decline may probably be a result of a strong yuan and lower demand from EU (chinadaily.com.cn 2015). As China is still a heavily export-oriented economy and the world’s biggest exporter, the export shrinkage is worrying trend that Chinese companies and factories may face a difficult time and job losses may be inevitable if the trend continues.
An effort to join IMF’s elite currency club
Another version of the story is that China was working hard to prove that its monetary policies are following the market and the economy development to the IMF who would later decide whether the Chinese Yuan (Renminbi) is approved to join the IMF’s elite currency club, the Special Drawing Rights (SDR) basket. For a long time, the IMF claimed that China should have a more flexible exchange rate allowing the yuan to depreciate or appreciate according to the market needs like many other currencies do.
On 30th November 2015, the International Monetary Fund agreed to add China’s Renminbi into the elite club of currencies that make up the organization’s basic unit of exchange. The inclusion into IMF’s Special Drawing Rights (SDR) is a milestone for Chinese Renminbi and also proves that its strategic move to devalue the currency in August is a successful decision.
List of reference
chinadaily.com.cn 2015 July exports decline by 8.3%, accessed on 20th Mar 2015 [online] available: http://www.chinadaily.com.cn/business/2015-08/10/content_21541888.htm
cnn.com 2015 China devalues yuan in shocking move, accessed on 20th Mar 2015 [online] available: http://money.cnn.com/2015/08/11/investing/china-pboc-yuan-devalue-currency/index.html