Time to Revisit China's and the World's Foreign Currency Exchange Rates

Watching how a change in the amount one country's currency, such as a US dollar, can buy of another country's currency, such as Chinese yuan, illustrates globalization at work. Currency exchange rates certainly demonstrate how countries are interconnected.

     What brings this subject to mind (after it was addressed in the earlier post, "When to Buy/Sell in the World Market") is today's Chinese devaluation of its currency by about 2% against the US dollar. Based on information in the earlier post, kids who have an interest in finance might conclude China was attempting to reduce the price of its exports in order to compete with lower priced goods from other countries. China's imports of luxury goods and electronics from the US would cost more, and US tourists in China would get more for their money.

     In the past, China selected a midpoint currency conversion rate that fluctuated between 2% above or below the US dollar. As a result of China's first devaluation, the US dollar could buy 6.22 yuan compared to 6.11 the day before. The next day the value of the yuan dropped a little over 4%, but that is nothing like the 20% to 40% devaluation that would be needed to compete with much lower priced competitors like Vietnam or Burma. Although China did not want to risk losing investment capital that would exit a country whose currency has this kind of weak buying power, subsequent devaluations have caused capital to flee.

     The truth is, demand is weak within China, as shown by Alibaba's slowed quarterly growth. China's $50 billion canal project in Nicaragua has been put on hold until 2016. While no reason was given, the stock market dip has caused the fortune of Wang Jing, CEO of the HKND Group funding the canal, to fall from $10.2 billion to $1.1 billion. Yet, in December, 2015, President Xi Jinping announced China would be giving Africa emergency food and $60 billion in grants and loans.

     Weak demand throughout the world is hurting all exporters, including South Korea and Taiwan. Countries that depend on their commodity exports to China are especially hard hit as reported in the later post entry, "Falling Commodity Prices Spur Diversification in Emerging Markets." A 2% currency devaluation and even a 20% devaluation will not cure sluggish worldwide industrial and consumer demand.