Regions

China devaluation: Is it a serious concern for US economy?

August 24
7:50 AM 2015

The recent devaluation of Chinese currency Yuan has already started creating tremors in the global markets and more precisely in the US economy as it's triggering an imbalance in  international trade.

The imbalance in the global trade will affect the US economy not only on macroeconomic scale but also small factors that affect everyday life right from milk price.

The average American started feeling the heat of global turmoil caused by China economy slowdown and its currency devaluation as prices of several commodities, entertainment cost everything in the US economy is being affected. 

The Chinese currency devaluation makes purchasing power of domestic market lower. Hence, Chinese consumer or importer finds it difficult to buy American products or import them. For instance, Netflix is planning to capture Chinese market and it has to compete with Chinese majors such as Alibaba. 

China consecutively devalued its currency Yuan for three days this month. The devaluation of Yuan will also force other emerging economies to follow the suit. Currencies of South Korea, Australia, Malaysia and India have started becoming weaker after the China's Yuan devaluation. 

Considering the adverse conditions in the market after the Chinese currency devaluation, Netflix has to offer products at lower prices to make it saleable in the China market. This will further put pressure on the company's profitability. 

Some analysts shrug it off saying the depreciation is small as Yuan still stronger than it used to be last year if it's considered on trade-weighted terms. The devaluation is part of Chinese government strategy to make Yuan to valuation arrived in a free-float market. So it takes longer time to see the Chinese currency devaluation, observe some analysts.

If the overseas business operations were on thin margins, then US companies are forced to increase prices in the American market to maintain the required overall profitability of the company. However, the severe competition in the US market will impact the company, whichever increases prices as there will always be a chance of losing valuable customers. 

Consumers don't mind a marginal increase in milk or other daily needs, but it matters a lot if significant fall takes place in the shares that they own. This will ripple through one sector to another and one country to another in the wake of globalization. 

There will also be an advantage for US companies, which find the current situation to import cheaper spare parts from China as the lower Yuan value enables Americans to buy more. But, the foreign exchange (forex) fluctuations will have drastic implications in the long run.

Yuan depreciation definitely makes Chinese exports cheaper. This will also boost demand for Chinese products leading to more demand for Yuan. This is a vicious circle or trade game or ripple effect on the US economy or any other emerging market following the currency devaluation in the world's second-largest economy.

© 2022 VCPOST, All rights reserved. Do not reproduce without permission.
Tags
Share

Comments

Join the Conversation

Subscribe to VCpost newsletter

Sign up for our Deals of the Day newsletter.
We will not spam you!

Real Time Analytics