With all of the talk in the news about China devaluing their currency I’ve been wondering something. It benefits them by giving them an advantage in exports. But what are the downsides of devaluing their currency?
I imagine it hurts their imports, but I’m guessing imports aren’t that important to them? Also, isn’t inflation usually associated with devaluation? Why isn’t there inflation in China right now?
lots of articles on inflation in China are just a google search away. They are also talking about price controls, e.g. see here China's price control measures 'on the way'
WARNING: This probably will not answer your question but is still interesting
I think the word you are looking for is debasement. Many people (and otherwise well educated people) beleive that debasement is a more recent thing. The Roman Denarius was first struck from .999 pure silver, weighing 4g ( 1/96th of a Roman pound or ‘lobos’ thus the XCVI on the back) by the end of the 2nd century it had shrunk in size to 3 grams or fewer and was less than 2% silver, the widespread inflation resulting from this led to it being replaced by the Argenteus. The Ottoman Akce was later replaced by the Kurus, when it was replaced one Kurus was approximately equal to 120 Akce. The process of debasement lets the government make financial gain by manufacturing more coins per amount of silver or whatnot, at the expense of the citizens. The resulting inflation allows the government to pay off bonds at the cost of the citizens standard of livng. hahah I did answer your question but only at the end of a very long unrelated post. >:D (this was supposed to be an evil grin but the goddamn emoticon machine won’t let me)
To answer your other question about inflation in China, the Chinese government is communist in other words the prices are set by the government which solves the inflation problem of debasement, the inflation will most likly pose more of a problem as the chinese economy drifts more towards capitalism.
OK, thank you all for your answers. Most of my questions are answered, but I still have a couple left. I tried Googling imports can’t find what I’m looking for. Is the devaluation seriously hurting imports, or is the government able to mitigate the effects? Second, are there any other problems caused by the devaluation, or are inflation and higher priced imports the only two (or at least the only two major problems)?
No, the word is not debasement. The word is devaluation. Totally different thing.
First, let’s look at revaluation. That’s what the world wants China to do.
That would be more painful than the current path, which is why China has resisted doing it for so long. But the cheaper yuan made it possible for it to build its reserves on the basis of money flowing into the country for its exports. And that also allows it to invest heavily elsewhere, in bonds, like in the U.S., in investments, many in Europe, and foreign aid, in many less-developed countries. And as code_grey’s link says, they have been issuing loans of their own.
Here’s a good overview article. And one paragraph summaries some of China’s reluctance.
So instead, they’ve been following policies that amount to a de facto devaluation, because they’ve been tilting the yuan toward undervaluation. That doesn’t necessarily result in the kind of rampant inflation that spells trouble. Even in the cited article, it’s only food prices that have been soaring, while the rest of the economy has a low inflation rate that is just what they would want. I suspect even the food price rise has little to do with foreign currencies and far more to do with the incredible migration of people off farms and into urban areas. That would automatically make food more costly because fewer people are feeding more without the transformation into the industrial farm system that allows the U.S. to get away with 3% farmers.
What will happen? Well, the U.S. and U.K. and the whole G20 insists on a formal revaluation.
Why should China do this? Mostly because they aren’t globally supreme yet. The top dog can distort the system and get away with it. That’s us. But we are heading for that belt-tightening, which will take some of the pressure off. Someone in the middle who tries this inflicts too much pain on everybody else for them not to also get hurt in the backlash. China doesn’t really want to make all of its trading partners angry at once, but that’s the path it’s been heading down. It’s growth is unstable and precarious. Half the country has changed status and location in recent years and faces more uncertainty in the future. China’s leaders have to battle internally-caused disruption vs. externally-caused disruption. The guess is that externally-caused disruption will be easier to control and less painful. But their leaders might guess the other way. Or they might try a bit of both and try to please everybody. That trick never works but everybody keeps trying it nonetheless.
China might be doing this for a while longer. I’ve heard on the news how Obama failed to get anything done about it during the most recent G20 summit. Apparently other countries aren’t that concerned about it yet.
As Exapano said: what the world is talking about is an appreciation of the Chinese currency vis-a-vis the dollar and other major currencies. You could look at it a different way in that this is effectively devaluing the USD.
Ha ha, you don’t hear the tea baggers saying this now, do ya? To be fair, you don’t hear Treasury Secretary Geithner saying that either. But, at the end of the day, currencies are a zero sum game. If the Chinese Yuan appreciates, it means the USD and other major currencies depreciate.
China has pretty serious inflation right now. It’s much higher than the headline inflation numbers based on ancedotal information.