All you need to know about Global crash in China : Part 1

China cut the value of its yuan currency against the US dollar, taking the reductions to 3.5 per cent this week, the largest in more than two decades.  The move has reinforced concerns about the world's second largest economy, and analysts are divided over the reasons behind the move and the consequences it will have. 

Why is China doing this now? 

The People's Bank of China (PBoC) said Tuesday's "one-time correction" in the yuan is part of a larger scheme to give the market a bigger say in the value of the currency, also known as the renminbi (RMB). 

At the same time Chinese growth has been slowing, and devaluation can boost the economy by making exports -- a key sector -- cheaper for overseas buyers. 

Also, Industrial production, investment and retail sales data for July were weaker than expected, while at the weekend figures showed Chinese exports tumbled 8.3% in July, their biggest drop in four months. After a string of weakening output growth figures going back to last year, the authorities have come intense pressure internally to address the slowdown with a dramatic policy shift.

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Where does the yuan stand internationally? 

A decades-long boom has turned China into the world's second-largest economy, but despite being the world's largest trader in goods its role in the global financial system remains relatively limited. 

It has been looking to build up its presence, setting up a new multilateral Asian Infrastructure Investment Bank, and is also pushing to join the exclusive club of the International Monetary Fund's basket of "special drawing rights" (SDR) reserve currencies. But it must show progress on liberalizing the yuan regime to win membership. 

How does China's foreign exchange mechanism work? 

The yuan is generally far more stable than most major currencies. The China Foreign Exchange Trade System -- which operates the national foreign exchange market -- and the central bank carry out a poll of market makers to set a daily reference rate, also known as the central parity rate. 

The yuan is allowed to move up or down two per cent from it each day. Officials will now also consider the previous day's close, foreign exchange supply and demand and the rates of major currencies when setting the fix. 

World over Impact:

1)      Dollar has gained value after devaluation of China’s Yuan. The devaluation could prompt an angry reaction from the US, which has consistently argued that the yuan is undervalued, damaging US exports. It could also force other Asian countries to devalue, making exports to the US cheaper and increasing Washington’s trade deficit further.

2)      Oil prices fell after China devalued its currency in its latest effort to prop up economic growth, making dollar-priced commodities more expensive and weighing on the oil demand outlook for the world's top energy consumer. 

3)      Australia has experienced an impressive economic boom in recent years on the back of selling natural resources, including coal and iron ore, to its Asian neighbors, and China accounts for more than a quarter of its exports. So weakness in the Chinese economy is bad news for Australia. 

There is lot more in this story . Keep reading the blog for more info and watch out for next part where we see the impact in India. If you like it share it and follow us, subscribe for email notification so that any important update is not missed.

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About the Author:  Pranav Nikam is an Electrical and Electronics engineer who is working in a renowned MNC in Chennai. He likes to work out in gym, do photography and play badminton. Through his articles he wants to spread awareness among other defence aspirants.