August 05, 2019
The New York Times ran a piece on China’s devaluation of its currency, which warned that the move could hurt China because commodities like oil, which are priced in dollars, will become more expensive for companies in China. While it is true that the devaluation will make imported goods more expensive, the fact that some are priced in dollars is irrelevant.
Suppose oil was priced in yen. Other things equal, the decision to devalue against the dollar would also mean that the Chinese yuan is devalued against the yen. This would lead to the same increase in the price of oil as if oil were priced in dollars. The pricing in dollars is simply a convention, there is no special importance to it in international trade.
The piece also raises the prospect that the drop in the value of the yuan, “could spur wealthy Chinese to take their money out of the country.” While it could have this effect, it may also have the opposite effect. Once the yuan has dropped in value the question is whether it is likely to fall further. This drop may lead many investors to believe that a further decline is unlikely, just as if the stock market fell by 20 percent, investors may come to believe that further decline is unlikely and therefore may be anxious to buy into the market.
It is also important to put the drop of the yuan in some context. The devaluation reduced the value of the yuan by less than 1.5 percent against the dollar. This is a large single-day movement, but it is not that unusual for currencies to move around by this amount against each other even without government intervention. Also, a 1.5 percent reduction in the value of the yuan will not have large effects on the price in China of oil or other commodities.
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