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If extempers followed global economic news over the past week, they probably remember that China’s currency devaluation was a significant topic. On Tuesday, the People’s Bank of China (PBoC) announced more market-friendly reforms that will allow the nation’s currency, called the renminbi (RMB) or the yuan, to be managed less arbitrarily. The effect of this market-based move was a sudden decline in the value of the RMB, a currency that some market analysts argue has been overvalued for some time. The 1.9% decline versus the American dollar last Tuesday was welcomed by some economists, who say that it will provide a valuable market correction, but China also came under fire from American politicians and Western economists, who allege that China’s devaluation is designed to help boost the nation’s ailing exports. The move has provided ample fodder for Republican presidential frontrunner Donald Trump, who has made anti-China sentiment a large part of his campaign. In addition, China’s devaluation may contribute to more deflationary pressures in Western economies and complicate the Federal Reserve’s decision about whether to raise interest rates by the end of the year.
This topic brief will discuss the steps that China has taken to devalue its currency, analyze the reasons why the Chinese government would encourage a currency devaluation, and highlight how China’s currency devaluation could affect the global economy.
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