Last August, financial markets went through a period of extreme turbulence when China decided to peg the value of the yuan lower against the dollar. There were fears that China was trying to boost its exports by devaluing its currency. The Chinese authorities had then assuaged markets by stating that the intent was to make the yuan market-linked and not to cause a serious decline in the value of the Chinese currency.

Eleven months later, the sceptics have been proved right: the yuan has depreciated 7 per cent since August 10, 2015. But the Chinese government needs to be lauded for the skilful manner in which it managed this depreciation without ruffling too many feathers. In the initial phase following the market-linking of the yuan, when the Chinese currency was closely watched, it appreciated against the dollar from 6.45 to 6.3 by the end of October. But the currency has been consistently sliding since last October and is down 5.8 per cent since then. It is probable that the Chinese government had hoped it would be able to support the yuan with its large war-chest of foreign exchange reserves. But intervention in the currency market has eroded reserves significantly; China’s foreign exchange reserves are down about 10 per cent since last August.

Whatever the original motive, this move to market-link the currency has helped China in two ways. One, it was able to make the yuan a part of the IMF’s SDR basket and two, Chinese exports became more competitive. Reports indicate China’s share in global exports increased to 13.8 per cent in 2015 from 12.3 per cent in 2014. This is the highest share any country has enjoyed in the last four decades. Global turbulence due to Brexit, and a stronger dollar and weaker euro are only going to take the yuan lower in the coming months. This is bad news for global trade as competition from cheaper Chinese goods is likely to intensify.

Lokeshwarri SK, Associate Editor and Head of Research

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