An Analysis of the U.S. Dollar Depreciation: Whether It Is Beneficial to Chinese Economy

Topics: Foreign exchange market, Renminbi, United States dollar Pages: 5 (1516 words) Published: February 25, 2013
1. Introduction
Under the environment of the Global Financial Crisis (GFC), the financial markets had a severe impingement, especially the influences to the American financial market. Meanwhile, as one of the largest American ‘trading partners’, the third largest ‘export market’, China offers USA a majority of imports and keeps close trade relation with USA (Morrison, 2011, pp2-6). It can be seen that the changes of U.S. dollar might affect the Chinese economy. In order to keep sustainable development, the Chinese government focuses on the influences of U.S. dollar alteration and considers whether it is beneficial to Chinese economy. Since 2008, U.S. dollar depreciation brings China plenty of benefits, whereas there still have a few drawbacks such as inflation and risk of debt repayment.

This project will describe the importance of the U.S. dollar, and then analyze the advantages and disadvantages of the depreciation to China. Finally, several suggestions about easing the impacts of devaluation will be provided.

2. The U.S. dollar depreciation
Since the global financial crisis began in 2008, many countries’ exchange rates experienced obvious fluctuations, especially some ‘currency depreciations’ in recent year (Kohler, 2010, pp39-50).

During the last decade, the most significant issue is the U.S. dollar devaluation in the financial markets. As the foundation of foreign exchange currency and the major currency of the international payments and foreign exchange transactions, the U.S. dollar plays a significant role in the international foreign exchange markets. Although it has supremacy in the global economic system, it is still badly hit the exchange rate of the U.S. dollar. According to the figure from ‘Exchange Rates UK’ (2011), it shows that ‘US Dollar (USD)’ to ‘Chinese Yuan (CNY)’ exchange rate has an obvious decreasing between 2008 and 2011, declining from 7.2798 to 6.3712. Therefore, more emphasis should be given to U.S. dollar devaluation for each country.

In fact, the USA government published a large number of T-bills to other countries in the international financial market (Morrison and Labonate, 2008, p2-6). However, whether USA highly relies on foreign investment is a good approach to solve the lack of funding. This question is worth thinking deeply. Moreover, a large amount of funding investment may increase Chinese contain to the USA economy (ibid). Therefore, the USA government should consider the possible risk from China to the American financial markets.

3. Advantages of U.S. dollar devaluation to Chinese economy
As a developing country, China follows some developed countries’ paces and learns their economic development concepts. Owing to U.S. dollar devaluation, China gains several benefits in its financial field.

Firstly, it is beneficial to promote Chinese exports structure optimization. As a matter of fact, China is one of the largest American sources of imports (Morrison, 2011, p8). In addition, the importing countries’ funding reserve decides the export demand (Chen et al, 2011, p24). Therefore, because of limited funding, the U.S. dollar depreciation leads to strengthen the control of American import amount that means it may improve the quality requirements of Chinese products. In order to maintain Chinese dominate position in the export market, China should improve product with technology content and added value, which is an efficient approach to increase the competitiveness of domestic product.

The other advantage is to expend consumption and improve the quality of Chinese residents. The consumption level could examine a country’s development degree, which equivalents to the level of citizens purchasing goods and enjoying life. Over the last decade, China has become the second largest consumer in the world (Stalk and Michael, 2011, p25). The government costs a large amount of funding and manpower in market synthesis and ‘infrastructure’ construction and provides its...
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