What’s the Effect of China’s Devalued Currency on the World
Date: 8 June 2016 Share on Twitter Share on Facebook
China’s GDP has been growing at a ravenous pace for much of the past few decades and this progress has seen it established very firmly as one of the world’s most important economies.
But more recent years have seen the pace of growth within the Chinese economy cooled quite significantly.
And this cooling has not been taken lying down by relevant Chinese authorities, who hope to see that growth return to its previous pace while maintaining or improving standards of living among the country’s many millions of inhabitants.
Among the mechanisms used by China to try to re-energize or otherwise benefit its economy are those linked to its currency, with the ramifications for other nations not necessarily high on the national leadership’s list of concerns.
Rightly or wrongly, these dynamics have come to be framed as ‘currency wars’, with some nations finding their economies being negatively impacted by the positions adopted by the powers that lie behind the Chinese renminbi.
Internal and external demand
For a number of years now China has been aiming to reorganize some of the key aspects of its economy in a way that means it relies more on domestic demand and less on external demand for its products and services.
Of course, given the scale and complexity of China and its economy, this transition has not been an easy one to manage, even in a country that is uncommonly familiar with large-scale centrally planned economic reorganizations.
The global Financial Crisis of 2008 and its aftermath made economic growth extremely difficult to come by in most countries worldwide and in China led to a slowdown in demand for its goods and services.
Ordinarily, this might have led to a squeeze on the incomes and spending power of most Chinese people.
But because this scenario is one that Chinese authorities are so keen to avoid, they have resorted to driving down the value of their currency to offset the prospect.
Effect of China’s devalued currency
The effect of China’s devalued currency is that it helps prop up domestic demand and encourage spending levels to continue increasing throughout the country.
For other countries though the impact can be one of destabilization and the emergence of dynamics that effectively serve to undermine efforts made towards economic growth, particularly for countries with lots of foreign debt and limited room for manoeuvre from a financial planning perspective.
Part of the problem for countries that are not China is that the renminbi is not as fully integrated as it might be into the complex mix of international currencies, despite the Chinese economy now being the second largest in the world behind the US.
In effect, there are not yet sufficiently impacting mechanisms available to other countries, even major world economies, to encourage China to act in the interests of the global economy rather than its own.
This situation may change in years to come but for now at least China’s so-called currency wars and a devalued renminbi look likely to remain features of international affairs and something of a drag on economic growth elsewhere in the world.