The revaluation of the Chinese Yuan

Understanding The Chinese Yuan And The Fluctuating Economy

 

Down, down, up. The revaluation of the Chinese Yuan…

The revaluation of the Chinese Yuan

About five years ago I stopped ‘doing’ procurement and starting writing about it.

One of the very first pieces I ever wrote was for Procurement Leaders. The article focussed on the impact the value of the Chinese currency (the Yuan) has on supply chains and more specifically the role that the Chinese government has allegedly played in manipulating this exchange rate for the benefit of its economy.

Manipulation 

China has, in the past, been accused of deliberately altering the value of the Yuan in order to make its products appear cheaper and thus more desirable in the export market. The strongest opposition to this practice has come from the US, who feel this manipulation has adversely impacted domestic suppliers as many American’s elect to buy cheap Chinese goods over US made products.

The US have also claimed the currency manipulations are anti-competitive and highlighted they have hindered the progress of US firms in China. By having a weak Yuan in relation to the US dollar, companies like Apple, that price in USD, found it more difficult to compete in the Chinese market with local suppliers who could produce a similar product at a lower price.

Despite the fact the value of the Yuan is not subject to market forces, but rather, is set by a team of economists, China has always maintained that its currency was fair and not been deliberately manipulated.

The debate continues

Jump forward five years and the value of the Yuan is once again making the front page of global business newsfeeds. Last Monday (August 10th) The People’s Bank of China announced it would make a ‘one time correction’ to the value of the Yuan.

This action, and accompanying confusion, sent global currencies into a spin. The Yuan dropped 2 per cent against the US dollar in a day.

Despite announcing only a ‘one time correction’ to the Yuan, The People’s Bank of China announced a further devaluation of the currency on Wednesday of last week. This caused analysts to fear that China’s wavering economic performance may be worse than they initially thought. Commodity prices and share values have continued to drop on the news.

To add further confusion to the situation, on Friday (August 14th) the central bank opted to raise the value of the Yuan against the dollar. The Bank has come out and stated “the market will play a bigger role in exchange rate determination.” Perhaps they were keen to show the value of the currency can go up as well as down?

For the time being, it appears Chinese goods will continue to be relatively cheap compared to the rest of the world. Some analysts have predicted that a flow of cheap Chinese made products will flood foreign markets (haven’t they already?) The uncertainty of over China and its currency is also likely to cast a continuing shadow over the tumultuous global commodity markets.