Downfall Of Yuan

Many people were expecting the devaluation of the Chinese currency Yuan. But the magnitude of devaluation came as a surprise for everyone, including these people. The Yuan has weakened 4% against the US dollar.
People’s bank of China states that Tuesday’s revision was a ‘one-time correction’ and Wednesday’s was ‘reflection of the mass system’. The reason for the same is that the way reference rate was calculated has been changed. From now on more market forces would be taken into consideration while calculating reference rates. Thus China calls it a market-oriented reform.
If is very important for China to make sure that its currency is driven by market sources.China is looking forward to setting up a new Asian infrastructure investment bank and also wanting to join the IMF’s basket of Special Drawing Rights Reserve currency. But in order to gain this membership, China will have to liberalize the Yuan. The two criteria for a currency to be included in SDR are-

Export criteria

Free usability criteria

Also, it’s mandatory to fulfill both the conditions at the same time. China struggled with the free usability criteria. However, it met the export criteria in 2010 itself.

Also, China could have bowed down the currency because of its poor performance. Export account for China’s 22% of the GDP. However, the exporters have not been very successful during the last four months and are not even close to fulfilling their target. Even if they now meet the official target of 7%, the economy will hit a 25 year low. By bowing down the currency, the country has made imported material costlier and this made the export competitive. And therefore a currency war can be expected in Asia very soon.
However, Beijing has insisted that its motives are pure.

How it will affect to India:-

Chinese products will become way cheaper resulting in India becoming a dumping ground for their goods. This will immensely affect the domestic industries in India.
The goods in which India and China are exporters will adversely affect the Indian traders.
The positive impact can be the capital inflow due to volatility in Yuan. Also, India will have to spend less in importing goods from China, considering the fact that India is net importer from China
How the World sees it:-

International Monetary Fund(IMF) has extended the current bucket of SDR currency by more nine month and new bucket of SDR Shall be made effective from September 01, 2016. Earlier it was to be made effective from January 01st, 2016. Some economist interpreted it as IMF has provided more times to countries and market to adjust in case Yuan is included in a bucket of SDR. While some interpreted it as IMF has provided china more time to make Yuan “Free Usable” and this depreciation of Yuan is one of the many moves to make Yuan “Usable”. The world economy is looking for another such move before September 2016.
The devaluation of Yuan was expected to cause a lot of harm to the Brazilian economy. But Brazil has lost more than 23% of its value since January. And thus Brazil is expected to win this so-called currency war.
America terms this as an unfair export advantage because this would affect the US oil industry. China is the second largest consumer of oil and thus gives maximum benefit to the US oil industry. With the devaluation of Yuan, the Chinese men won’t be able to buy the expensive crude oil imported from America and this will affect the US oil industry severely as their sales would decline at a very fast rate.

This article has been contributed by Simmi Setia, Content Writer at LegalRaasta, an online portal for GST Software, GST Return Filing, GST Registration, Section 8 Company Registration, Nidhi Company Registration, IEC Registration, Fssai License, File ITR Online.