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China’s devaluation: what does it mean?

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LAU professors say that the devaluation was a necessary move and is relatively contained.

September 11, 2015—

For the first time since 1994, China recently devalued its currency — the yuan — taking almost 2 percent off its value. While the yuan is pegged against the dollar, the People’s Bank of China (PBoC) still retains a margin of action in the establishment of the official exchange rate.

Such a move has taken analysts aback and sparked debate over its reasons and the consequences that the depreciation might have on the global economy.

According to Marcel Schröder, assistant professor of economics at LAU, China’s move should be seen as a sign of progress. In his paper “Should Developing Countries Undervalue Their Currencies?” (recently published in the Journal of Development Economics) the empirical results suggest that both an over- and undervalued real exchange rates are detrimental to economic growth in developing countries.

By this token, Schröder sees the Chinese move as a beneficial correction. “China’s currency seemed slightly overvalued in recent years,” he says. “Now this currency adjustment is helping bring the yuan much closer to its long-run fundamental value.”

According to Schröder, “China’s exchange rate policy is expected to become more flexible as part of its development process. The PBoC’s decision to devalue the yuan in the face of China’s recent economic slowdown thus signifies a turn in the direction of a more flexible exchange rate management strategy.”

Taking the long view, the devaluation — albeit coming from the world’s second-largest economy –— is still relatively contained. “China is more likely going to pursue a policy that strongly supports the yuan to prevent further devaluation,” says Mohamad Karaki, assistant professor at LAU whose research focuses on macroeconomics. “Further reduction in the value of the yuan would trigger more capital outflow which will negatively affect the Chinese economy.”

With regards to the repercussion on the Lebanese economy, Karaki believes the Chinese devaluation will hardly be felt in the country. “In theory, given that Chinese exports are cheaper now following the devaluation, we would expect Lebanon to import more and export less,” he says. “However, given that the People’s Bank of China is now working hard on propping up the currency, I suspect the effect of the yuan devaluation that occurred in August will have a very limited effect on the Lebanese economy.”


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