A Simple Guide to China’s Devaluation of the Yuan

What happened?

China devalued the Yuan against the U.S. dollar

Why did this happen?

China devalued its currency against the U.S. dollar to make Chinese goods cheaper and boost exports after Chinese exports declined 8.3 percent in July.

What does this mean?

The Yuan is loosely tied to the U.S. dollar and has been strengthening as the U.S. economy picks up. The U.S. Fed is considering a rate hike in the near future as the U.S. economy continues to move ahead, thus further strengthening the dollar.  As China is an export-oriented economy, this potential increase would put greater pressure on declining exports.

What are the impacts to the U.S.?

A cheaper Yuan will mean a decrease in U.S. exports as Chinese products will be less expensive.  As other nations consider the impact of the Chinese devaluation to their exports, they too may devalue their currencies to remain competitive with the Chinese goods further putting pressure on US exports.

What are the Impacts to other parts of the world?

The Chinese currency implications go beyond the devaluation as it’s a symptom of its overall economic health as the Chinese growth engine continues to slow down.  This will have far reaching implications for emerging markets that export heavily to China, particularly commodity exporters heavily dependent on China like Brazil, Russia, South Africa, Indonesia, and Malaysia. A weaker yuan is also a concern for developing nations that compete with China in exporting similar goods and services to similar destinations. Taiwan and South Korea face some of the greatest risks, but Thailand and the Philippines may also be affected and even Mexico may feel the impact of cheaper Chinese goods.

All this comes at a time when emerging markets are facing other factors and issues are affecting their growth.  While larger economies are able to sustain and mitigate the Yuan depreciation, China is still the world’s second largest economy, and emerging markets which heavily depend on China are important to the overall global economy. Their health will have an impact on global markets.

What does this mean for Florida?

The Chinese currency depreciation will have an impact on Florida exports, which compete with China.  Florida will need to remain vigilant to the currencies of Florida’s trading partners such as Taiwan and Korea, who are strongly tied to Chinese trade. As their currencies may weaken as well, adding to the fallout of the Chinese devaluation.  The Florida Chamber’s International Program will keep you up to date as this issue unfolds.

NEED MORE INFO?

For more information on how this affects Florida’s future, please contact the Florida Chamber’s Chief Economist Dr. Jerry Parrish at jparrish@flfoundation.org.