PARAGON INTERNATIONAL UNIVERSITY

ECON 212 – Introduction to the International Finance

Section 1

Research Paper on

The Impacts of Yuan Devaluation on

China’s Trade and Investment

Lecturer by:

Group 4:
Sivyingcheav Chhour
Sivly Houy
Siekmouy Khov
Saim Kreang

Academic Year: 2019 – 2020

 Content

I. Introduction

II. The Impact of Yuan Devaluation on Trade

A. The Positive Impact on Trade

B. The Negative Impact on Trade 

III. The Impact on Yuan devaluation on investment

A. The Positive Impact on Investment

B. The Negative Impact on Investment

IV. Conclusion

Bibliography

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 I. Introduction
China is one of the countries that implemented the fixed exchange rate regime in which
the value of a currency is fixed or pegged by monetary policy authorities against the
value of the foreign currency. Under the fixed exchange rate regime in recent years, there
was tension between China and the United States, called the trade war, which has created
a slightly slower economic growth in China. However, the China authority has decided to
lower the value of the Chinese Renminbi or Yuan against the US Dollar. Also, due to the
issue of market sentiment at the time and bad luck of building the trade war with the
United States, the reform experience changed the market to panic and the renminbi
dropped quickly [CITATION YuY18 \l 1033 ]. Thus, the decreasing of the Chinese
currency has brought both positive and negative impacts on China’s trade and
investment.
 
II. The impact of Yuan devaluation on trade
A. The positive impact on trade
China is the largest exporting product to other countries in the rest of the word in terms of
automatic data processing machines and components, textile, mobile, and integrated
circuits. Also, in 2017, the transportation and travel service were a huge part of exporting
service categories in China[ CITATION Agn19 \l 1033 ]. Thus, the benefits of the
devaluation of home currency will help China to boost the consumer market and
commodity importing economics[ CITATION Fra20 \l 1033 ]. A weaker Chinese
currency has made the Chinese products cheaper to export with trading partners
especially from the U.S. businesses and consumers and potentially boosting the oversea
sales that are the main drivers of China’s growth even the President of the United States
has imposed heavy tariffs on this country[ CITATION Mar3 \l 1033 ]. According to
Ange Blazyte, in 2019 the export of domestic products increased more than one percent
compared to 2018 that approximately 2.5 trillion[ CITATION Agn19 \l 1033 ].

B. The negative impact on trade 

In the past five years, the People’s Bank of China (PBOC) intervened for the first time in
currency controls after the reformation in 1994 to devalued currency to strengthen the

3
 Chinese economy. International trade in devaluation terms, the import was in a downturn
because Chinese consumers need to pay more local currency for purchasing foreign
goods. According to Violability, devaluation of Chinese currency will put down imports,
and raise the price for imported goods as a result of home [ CITATION Wan14 \l 1033 ].
It has indirectly encouraged the price of the imported raw materials and equipment of
price to be high for other relevant commodities, and those rising prices will continue to
influence other substitute goods. Therefore, the rising of all this series price will
gradually be spreader to all goods. Due to the World Integrated Trade Solution, in 2015
China’s import was approximately 1679.56 billion US Dollars, but in 2016 the import
was only 1587.93 billion US Dollars [CITATION Wor \l 1033 ]. That is to say, after
devaluing the Yuan, imports have significantly decreased. Furthermore, during the trade
war in 2019, China devalued its currency below 7 per dollar for the first time over a
decade to prevent and balance the trade tariff by the Trump administration that took
effect on September 1st. Due to Statista, in 2019 import goods of China was seen to
decrease in value to nearly 3 percent if compared to a year earlier [CITATION Ang20 \l
1033 ].  As we see, after the Chinese devalued its currency, its import reduced as well.

III. The impact on Yuan devaluation on investment

A. The Positive impact on investment
The devaluation of the Yuan currency has brought significant impact to investment
through expansion and flourish of direct investment. Because the foreign investors could
make lots of China’s currency by paying a small amount to their local currency in
exchange. With this depreciation, it also helps the investor to gain more assets and utilize
economic labor  [ CITATION Asi11 \l 1033 ]. Due to Rhodium Group, China attracted 126
billion US Dollars which are approximately 781.4 billion yuan in 2014 on non-financial
foreign direct investment which increased by 6.4 percent over 2014, reported from the
Ministry of Commerce of China. The report also marked 2015 as the fifth year in a row
of growing FDI. The services sector amounted to almost 61% of total FDI which grew
faster than other sectors 17.3%, at the same time FDI in manufacturing remained stable at
31% of total FDI compared to 2014. FDI in Foreign trade zones such as Guangdong,

4
 Tianjin, Fujian, and Shanghai were seen to grow particularly fast [ CITATION Rho16 \l
1033 ].

B. The negative impact on investment

 The decline of manufacturing
The falling of the nominal exchange rate has heavily affected the investment. The
dropping price has undermined spending, investment, and feed through to wages, as
consumers and business has decreased spending and expecting goods to be cheaper in the
future[CITATION 5th15 \l 1033 ] . In recent years, China’s growth rate has dropped to 7
percent because the Chinese government implemented the lower Chinese currency as a
benchmark to versus the United States that made the investors in China slightly
decreased, declining from around 9% in 2018 to approximately 3% in 2019. This weaken
of investors on manufacturing would also affect the jobs, output and the high demand of
products which hit on the economy, while the manufacturing had responsible for about
30% of total fixed-asset investment and more than 20% of China's GDP [CITATION chi17 \l
1033 ].

 The fragile investor confidence

The devaluation of Yuan has caused some severe namely led the stock market of
investors to smash in China, and in just a few days, billions of its dollar reserves have
disappeared. Moreover, the undervalue also led heavy bets made set against the currency,
leading to vast capital flight from China, and further weakening its external
position[ CITATION Dee19 \l 1033 ]. Since the deeper devaluation of the Yuan, it has
made balance become smaller increased in capital outflow and put Chinese major state’s
companies’ firms in the sector of transport, telecoms, and airlines faced in trouble of
becoming large defaulters on the international market, worthy around 550 million by mid
of 2015. The rising value of U.S dollars has made the incentive to lessen their dollar debt,
while the new peg hitches the yuan[ CITATION God20 \l 1033 ]. As the investor in
China are required to pay more domestic currency to exchange the US
Dollar[ CITATION Dee19 \l 1033 ]. Subsequently, Dollar-debt denominated has

5
 increased in the Chinese corporate sector that made Chinese companies and investors
have collective huge levels of US Dollar debts in recent years. With the amount,
approximately 1.13 trillion USD of debt repayments have made on their US Dollar-
denominated debt that comprises $729 billion from the loan of the international bank, and
around $405 billion from bond issuance. Also, the depreciation of the Yuan currency had
raising concerned over many firms and investors with dollar debt; brought the heavily
exposed to the serious trouble of debt threat on the real estate development sector. For
instance, one of the real estate investments in China, the “Everglade” had accrued around
$100 billion in debt [CITATION Anj20 \l 1033 ].

IV. Conclusion

In conclusion, the policy of China’s devaluation of the Yuan currency has reflected both
side effects of economic sensitivity and benefits. With the positivity impact, the
depreciation to China would be the significant tool of influence the payment balancing
for the economic reform to make the enlarge and sufficiently market for trade and
investment. [CITATION Chi00 \l 1033 ] Whereas, the negative impact of devaluation
currency will bring a decline in manufacturing and the risk for the investors in China.

6
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