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Yuan Devaluation: What Lies Ahead?

CASE FLYER, MANAGERIAL ECONOMICS
ET Cases, 5 pages
AUTHOR(S) : Syed Abdul Samad and Dr. Nagendra V. Chowdary

Case Preview

Yuan Devaluation: What Lies Ahead?

 

Expected Learning Outcomes

• Devaluation of a currency and the reasons why countries resort to devaluation
• Reasons behind China’s devaluation of Yuan, and the positive and negative effects on its economy
• Impact of China’s devaluation of Yuan (vis-à-vis US Dollar by 1.9%) on Indian economy

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I. Devaluation of a Currency: The Economic Logic

1. What is exchange rate and how is it determined?
2. What are the three popular exchange rate methods followed by most of the countries?
3. What is currency appreciation and currency depreciation? How is a country affected by currency appreciation and currency depreciation?
4. What is currency devaluation? What is the difference between depreciation of currency and devaluation of currency?
5. ...................................

II. China’s Yuan Devaluation: Impact on its Economy

1. How do you think China’s currency is structured? Is there a difference between Renminbi and Yuan?
2. On August 11th 2015, China devalued its currency by 1.9% vis-à-vis US$, as the base article reports. What do you think are the prime reasons for China to have devalued its currency? Is this a national ignominy or is it a national necessity?
3. What does China’s currency devaluation mean for the rest of the world?
4. ...................

III. China’s Yuan Devaluation: Global Impact and Indian Concerns

1. The base article argues that, “A more competitive Yuan will impact competing imports from India such as cotton and textiles.” Why do you think Indian exports would be impacted because of China’s Yuan devaluation?
2. Some quarters from India’s economy, especially tradesmen and economists, express their “fear of Chinese dumping of commodities, paper, steel, chemicals, petrochem” as the base article points out. Do you think these fears are justified? If yes, why? If no, why not?
3. ................

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Teaching Note Preview

Yuan Devaluation: What Lies Ahead?

 

Synopsis

On August 11th 2015, China devalued its currency against the US dollar by 1.9%. The devaluation of Yuan by China sent shock waves across the global markets in general and Indian market in particular. The devaluation of Yuan – the biggest one-day loss since China unified officially and market exchange rates in 1994 – is aimed at delinking its currency Yuan from the US dollar and change the reference rate. While China might have intended to devalue its currency for getting China’s Yuan into IMF’s SDRs (along with US Dollar, Euro, Pound Sterling and Japanese Yen), import-substitution and export-promotion, it affected many countries’ currencies in the Asia-Pacific region. This case flyer analyzes the reasons and the impact of China’s devaluation of its currency (Yuan).

Prerequisite Conceptual Understanding/Before the Classroom Discussion

The participants should be asked to read the following chapter to help them connect the concepts discussed in the case flyer:

  • • Paul A. Samuelson, et al., “Exchange Rates and the International Financial System”, Economics, 19th Edition (Special Indian Edition), McGraw Hill Education (India) Private Limited, 2014 – To understand the concepts of devaluation of currency, the reasons why countries take up devaluation and its impact

 

Case Positioning and Setting

The case flyer can be used in MBA, Executive MBA or Executive Development Programs, for the following module/topic:

  • • Foreign Exchange Rates – To understand the concept of devaluation of a currency, the general reasons for devaluation, its effect on the country’s economy and other countries

 

Preamble to the Case Flyer Analysis and Suggested Orchestration

This case flyer gives an understanding about the concept of devaluation of currency. It further helps the students/participants in understanding the logic behind devaluation and explains the reason as to why countries resort to devaluation. It gives the advantages and disadvantages of devaluation and explains about the effects of devaluation of currency on the domestic economy and the economy of other countries. By analyzing the facts presented in the base article3, this case flyer would try to derive the positive and negative effect of devaluation of Yuan on Chinese and Indian economies. This case flyer analysis was carried out as presented in Exhibit (TN)-I................

Case Analysis and Discussion

I. Devaluation of a Currency: The Economic Logic

This section of the case flyer helps in understanding about the currency exchange rates, exchange rate determination, currency appreciation and depreciation. Also discussed are the concepts of devaluation and competitive devaluation. A basic and rudimentary understanding of the concepts and their macro and micro implications would auger well for appreciating the interconnectedness of global economies.

1. What is exchange rate and how is it determined?

Exchange Rate is the price of one country’s currency measured in terms of another country’s currency. It measures how much of one currency can be purchased with one unit of the other currency.

For example, the exchange rate between US dollar and Indian rupee, as on October 8th 2015, was 65.11, i.e., it took `65.11 to purchase US$ 1.

This exchange rate is determined by the demand of the currency and the supply of the currency. While the demand of currency is the domestic resident’s need for foreign exchange to consummate intended overseas transactions, supply is the foreign residents need for US$ to consummate transaction in the US represented using a graph [Exhibit (TN)-II].............


Exhibits

Exhibit (TN)-I: Suggested Classroom Orchestration

Exhibit (TN)-II: Exchange Rate Determination – Demand and Supply

Exhibit (TN)-III: Depreciation vs Devaluation of Currency

Exhibit (TN)-IV: Impact of Yuan’s Devaluation on Other Global Currencies

Exhibit (TN)-V: Reasons for Dragging Down of Competing Currencies

Exhibit (TN)-VI: Effect of Yuan Devaluation

Exhibit (TN)-VII: Yuan’s Devaluation Leads to Deflation

Exhibit (TN)-VIII: The 4C's of Global Markets Interconnectedness/Integration

Exhibit (TN)-V: Effect of Yuan Devaluation in India

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Abstract


This Case Flyer attempts to analyze the reasons and the impact of China's devaluation of its currency (Yuan) on August 11th 2015. China devalued its currency against the US dollar by 1.9% sending shock waves across global markets and undoubtedly Indian markets too experienced the tremors. While it is intended for import- substitution and export-promotion, from China's point-of-view, how would China's devaluation of its currency affect the Indian economy? Which segments of Indian economy would be affected? This devaluation (the biggest one-day loss since China unified officially and market exchange rates in 1994) is aimed at delinking its currency Yuan from the US dollar and change the reference rate. The big picture, yet to emanate, behind this devaluation may be getting China's Yuan into IMF's SDRs (along with US Dollar, Pound Sterling, Euro and Japanese Yen).



Pedagogical Objectives

  • To understand the economic logic behind devaluation of a currency and debate on reasons for countries to resort to devaluation as a macroeconomic policy
  • To discuss and debate on the reasons behind China’s devaluation of its currency, Yuan, and examine the positive and negative effects on China’s economy
  • To analyze the impact of China’s devaluation of its currency, Yuan (vis-à-vis US Dollar by 1.9%) on Indian economy

Case Positioning and Setting

The Case Flyer can be used in MBA, Executive MBA or Executive Development Programs, for the following module/topic:

  • Foreign Exchange Rates - To understand the concept of devaluation of a currency, the general reasons for devaluation, its effect on the country’s economy and other countries



This Case Pack Includes:
- Abstract
- Case Flyer
- Analysis


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