Renminbi Crashed

The Chinese currency, Renminbi (RMB) has been depreciating since the beginning of 2016, and shows no sign of reversion. On January 31, RMB stood at 6.611 per USD, the weakest point since April 2011. It has declined for one straight quarter, from 6.3044 on November 1 down to 6.611 on January 31, representing a 5% depreciation that should keep a lot of people up at night. Firstly, those who are going abroad are most likely to be affected. Most of them are students to study abroad. They will have to spend more on tuition fees and living costs, since more RMB are required in exchange for the same amount of foreign currencies. Secondly, those who will have to deal with foreign currencies will also be affected. For example, those who like to do overseas shopping online, this group of people likes to buy overseas goods, such as apparels and cosmetics of famous brands, which all have to be paid in foreign currencies. Besides, tourists to travel abroad will be affected, both DIY travelers and package tours can’t be free from this influence.

In addition to the abovementioned direct impacts, RMB depreciation also has other indirect influences on Chinese people. For example, a few years ago when RMB appreciated, huge amount of foreign capital flowed into China’s real estate industry. As RMB is depreciating now, foreign capital is flowing out, which will definitely have impacts on China’s real estate, especially those in the first tier cities like Beijing, Shanghai.

Moreover, following the depreciation of RMB, consumables prices will hike. Given China has already under inflation, the money will be less and less valuable and people’s purchasing power will decline. However, RMB depreciation needs not be all bad to China. Meanwhile, the manufacturing sector, a key pillar of China’s economy, suffered badly since RMB appreciated continuously in the last 5 years. The devaluation of RMB might stimulate the exporting of domestic industries including textile, iron & steel, electronics, chemicals, automobile, thus benefiting economy.

A recent International Monetary Fund study estimated that a 10% depreciation of an economy’s real effective exchange rate translates into an average boost in its real exports of 1.5% domestic products, yet it will take time to see that.

In Chinese astrology, 2016 is the year of the monkey that is ambitious and adventurous, but irritable. The Monkey has already shown its irritation in the first month of the year, China’s economy is expected to face lot of challenges in the following months, see if the Monkey will bring China good luck and new opportunities in the rest of 2016.

(Photo Credits: Faungg via Flickr)

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