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This theme has been covered in 2 parts. Read the Part #1, here.
During 1997, most of East Asian countries witnessed financial crisis. This led China to devalue its currency in order to encourage its exports.
During 2005-06, China had come back to market-determined exchange rates , but later shifted to managed exchange rates.
Currently, Chinese economy is witnessing slowdown, due to dip in exports.
Do keep in mind, that China is export-oriented economy, unlike US which is more of consumption-based economy.
Technically, it is depreciation because China has allowed market forces to operate in determining the exchange rates. This is the reason, you may find at times, newspaper writing depreciation.
Because, Central Bank of China determines when the market forces will play their role.
Basically, before the this move, Chinese currency was a managed exchange rates, i.e. Central Bank decided the exchange rates.
As China knew that its currency will depreciate due to economic slowdown, so it allowed market forces to operate, i.e. China withdrew from currency exchange market.
Few questions, which may surface into your mind, that China could have simply devalued its currency. Why does it want market forces to play a role in determining the exchange rate.
Since Chinese economy is heavily dependent on exports, therefore China wanted to make its exports cheaper & thereby boost its exports.
China has been demanding from long time, that its currency Yuan, be made a global reserve currency at IMF.
Actually, IMF is a vocal supporter of free market economy, but, Chinese currency was managed by its Central Bank. Therefore, IMF rejected the demand to include Yuan in SDR.
This was the reason Chinese central bank allowed market forces to play their role.
Published with inputs from Pushpendra