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China devalues in attempt to reverse economic woes

China devalues in attempt to reverse economic woes

This week, China's central bank devalued the yuan (also known as renminbi) currency by nearly 2% against the US dollar.

The world's second-largest economy has been undergoing a reversal of fortunes as of late, and the latest surprise move shows just how much the authorities want to address the financial slowdown.

Exports

Exports fell by 8.3% in the 12 months prior to July this year, and although gross domestic product (GDP) grew 7.4% in 2014 it was the slowest increase since 1990.

Although China's move is a surprise to many, those in the accountancy sector know that this tyre of devaluation is aimed at making a country's products more attractive to overseas buyers.

However, this is the biggest drop in value since the major overhaul of the country's currency system in 2005.

Reforms

As well as boosting exports, another reason for the latest move by the central bank could be linked to efforts to be included in the "special drawing rights" (SDR) reserve currencies of the International Monetary Fund.

The SDR is currently made up of the US dollar, British pound, European euro and Japanese yen.

The IMF has previously stated that "significant work" was needed in order for China's currency to be considered in the next review due in November.

Twin aims

Director of international finance research office at the Chinese Academy of Social Sciences, Liu Dongmin, commented: "A reasonable adjustment of the RMB's value is good for China's exports and also good for the RMB to be admitted to the SDR." 

"But most importantly, this marks key progress for RMB exchange rate reform since 2005 and a major step for RMB marketisation," he continued. 


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