China's Currency Devaluation

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Oct 21, 2016 02:07
This month, after years of effort, China finally succeeded in getting the Yuan included in the IMF’s Special Drawing Right’s basket, hoping that it will get an enhanced stature and will be treated as an elite currency along wtih the likes of the Dollar, the Euro and the Yen. The Renminbi will have around the third largest overall share of the new basket at roughly 11%.

Critics say it’s more symbolic than practical, because the share is peanuts to China’s economy. For years, the Chinese government has been blamed for rigging the exchange rates, though officials have always denied it. After the Renminbi’s entry into the SDR, there’ll be less wriggle-room for manipulation, so the value of the currency will keep falling steadily. Since mid-2015, the RMB has fallen around 10% against the US dollar.

At the early stage of the 2008 world financial crisis, China suffered as well. Housing prices and exports slumped. Actually, this could have been a good opportunity for the country to restructure its economy. However, the government was so afraid of social instability that it chose to invest 4 trillion yuan in infrastructure development to boost the economy. It saved China from financial crisis in 2009, and the growth rate of the GDP that year was 8.9%, dwarfing those of many other countries. But it has only postponed the crisis instead of solving it, and the bubble has kept growing. China’s fallen into a vicious cycle: the economy becomes stagnant, after which government-funded investors stimulate it; stagnation, investment and stimulation, over and over. Now, the total value of the real estate in just China's four biggest cities (Beijing, Shanghai, Shenzhen, and Guangzhou) exceeds the value of all the real estate in America!

Making the currency freely convertible should be a requirement, but the government wouldn't want to do that at the moment as the value will probably plummet. But many companies and individuals have started to work around the restrictions and resort to increasingly complicated methods of getting money out of the country…