Where Would The Depreciation Of Renminbi Leads World Economy?

G-20 officials of the G-20 Finance Ministers and Central Bank  meet in Shanghai last Saturday. Among several hot topics on the meeting, the most focused one was that whether China would significantly devalue its RMB. Global anxiety had grown in recent weeks that China would engineer a significant yuan devaluation as it experienced the slowest economic growth in a quarter-century although Chinese Premier Li Keqiang and central bank chief Zhou Xiaochuan worked hard to dispel worries among visiting G-20 finance ministers and central bankers that their economic strategy would not intentionally weakening the exchange rate of RMB.

Chinese economy slowed down a lot last year, forcing government to stimulate economy by cutting interest rate and minimum reserve ratio for private commercial banks. In addition, Central Bank of China made an announcement on Aug.2015 that it will stop intervene the exchange rate of RMB and try to make it float with market forces. All of these actions actually account for the depreciation of RMB against US Dollar during the past few months. The bad economic expectation and low demand domestically together result in depreciation of Chinese asset as Shanghai Composite Index end up losing nearly 15% last year after reaching 5250 in the middle of the year. It will make Investors around the world more panic about their asset depreciation if Chinese government cannot manage RMB exchange rate stable. The potential even bigger capital outflow and selloff as consequence will crush RMB and other Chinese assets, making China and therefore entire world back into recession since china as world’s second largest economy has huge influence on world’s economy.

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On the other hand, but what if Chinese government has the ability to maintain exchange rate at reasonable low level and can prevent crushing from happening.?  Under this circumstances, could China only take advantage of depreciation of the RMB? And would it benefit world economy as a whole?

As we all know, the low value of home currency will rise the competitiveness of China especially small export business at southeast part of China, which is the most representative indicator of a country’s economy condition. Imagine a situation under which corporations, benefit from low currency value, could export more goods and services to its trade partner Those increase amount of export will boost China’s GDP figure as well as the confidence of investors in the US, European and other part of the world. It will help China’s economy to thrive again the demand of industrial material like crude oil, steel and copper etc… The trade related industry will rise at first in china, then other industry like consumer goods. It will at the end make world economy thrive again. As long as China has increasing demand, commodity price around the world will increase again thus will at the end make world economy thrive again.

Above I demonstrate two opposite extreme circumstances to which the devaluation of RMB would finally lead world economy. For now,  haven’t seen any sign that Chinese government will further depreciation of its yuan because the risk I mentioned above as well as pressure from the world. As Christine Lagarde, the managing director of the International Monetary Fund, said after the weekend meetings in Shanghai “china has no intent, no determination, no decision whatsoever to devalue the yuan.” But if the situation of Chinese economy gets worse, Chinese government might take a chance to further devalue yuan to rescue its own country

 

Reference:

1.http://www.wsj.com/articles/g-20-says-economic-risks-have-risen-globally-1456573825

2.http://news.sina.com.cn/zhiku/zjgd/2015-10-26/doc-ifxizwsm2386320.shtml

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