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Yuan devaluation: Importing from China just got cheaper

Category: News; Updated on: 2018-06-03 14:42:11; Views: 2026

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Yuan's value versus the US dollar (click to view bigger image). Source: Forbes

China sprung a financial surprise Tuesday, Aug. 11, when it announced it would devalue the yuan. The same day, the currency fell 1.9 percent, the largest one-day drop in 10 years, to close 6.32 against the US dollar. It dropped a further 1.6 percent Wednesday, Aug. 12.

The devaluation is a move to reinvigorate exports. An overvalued yuan makes China products more expensive abroad, thereby deterring orders, a major factor behind flagging exports. In July, overseas shipments fell more than 8.3 percent YoY.

A devalued yuan, on the other hand, means China goods can be imported at lower prices. This makes China products more competitive with neighboring exporting hubs, consequently spurring orders and giving the economy a shot in the arm. The Wall Street Journal said increasing exports will help ease the burden of industrial capacity, which holds down prices and crimps profits.

In the same article, Yu Mingliang, director of business development at Zhejiang Lianda Forging & Pressing Co., said the devaluation definitely helps exports. "We welcome any cut no matter how much it is."

Yu added that if the yuan remains at the lower level, higher export revenue "could help subsidize a more expensive workforce." Zhejiang Lianda, a mechanical parts supplier in Wenzhou, has reduced its workforce due to weak domestic and overseas demand.

Amid signs indicating the devaluation is a way of propping up exports, the People's Bank of China said the yuan has been rising in value when supply and demand dictates that it should have fallen. The move was carried out to make the yuan more market-oriented.

The country's currency system is different in a way that the yuan's exchange rate is allowed to change within a 2 percent band left or right based on the previous day's trading price, preventing a wide range of swings.

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