Many citizens of developing nations are more worried about the fluctuation of their local currency rates against the US dollar, when they should be concern themselves more on what they are actually producing for export.
In this world of trade, what matters more is what a country produces, as that affects not only the currency rates, but also the overall livelihood of the locals.
How much a country produces, and how much it exports, is very important. The details of the goods and services produced by a country, with respect to the total production of the world, in per capita terms, is what matters most. Thus, it is important to know how many units of goods a country produces in per capita terms.
If we look at the available data on trade from the IMF on most countries, we find that their exports are 60% or less of their GDP. The same applies for most European countries. While China has an export ratio above 70%, it can be argued that its exports are far from covering its imports in per capita terms, but China is not necessarily worried about the fluctuations, as they have managed to create a good market share of international exports of its goods and services.
Countries like Zambia, in recent months, have been facing currency rate fluctuations, measured against the dollar, as they were losing value. However, this is not the whole story. Their export growth was on the same year, far exceeding that of oil exporting countries like Libya or Venezuela.
China, in 2014, had a GDP growth of 7.7%, and its exports grew at 14%, whereas Zambia's GDP was 5.9% and its exports grew at 15%. A country like China is now becoming a major export destination for Zambia. This is a good story to tell, as it helps to bring about more foreign investments to Zambia and also help in attracting better services from other developing countries towards Zambia's economy. So, even though the actual currency of Zambia (the kwacha) was facing a downfall, the productivity of Zambia was increasing, which is what matters in economics.
The Chinese yuan is arguably undervalued, as a deliberate strategy to make producing goods in China viable for global manufacturers and investors. A country can value their currency at a rate that makes investment attractive, whilst just ensuring the macroeconomic environment is stable, and there are labour friendly laws and policies to ensure human capital for more production. It is great to have a strong currency, but it is more important to have a strong economy, and China has managed to create a good record in this area. A country's productivity and trade matters more than the currency rates.
What is also very interesting, what matters as an average per unit of goods produced? Whilst China's exports have been increasing well above its GDP growth in recent years, which shows that productivity has been growing well for the Chinese economy, other developed countries like Japan or Germany are still only producing so much.
In 2014, for instance, Japan exported US$568 billion worth of goods and services from its economy out of a total production output of US$4 trillion. The currency rate of the Japanese Yen against the USD is very low that when you just look at output, you would assume that it must be valued at par or close with the USD. It is not, and not necessary, because it is productivity that matters in this world of trade, more than just the rate of a country’s currency.
On August 11, 2015, the People’s Bank of China (PBOC) surprised markets with three consecutive devaluations of the Chinese yuan renminbi (CNY), knocking over 3% off its value. Since 2005, China's currency had appreciated 33% against the U.S. dollar. The first devaluation marked the most significant single drop in 20 years. The move was unexpected, and many believed it was a desperate attempt by China to boost exports in support of an economy that was growing at its slowest rate in decades.
Given that China is the world’s largest exporter and its second-largest economy, any change that such a large entity makes to the macroeconomic landscape has significant repercussions not only to them, but other countries too. With Chinese goods becoming cheaper, many small- to medium-sized export-driven economies continued to see reduced trade revenues, with some adopting the China model to ‘China, China!’ per se. If these countries are debt-ridden and have a heavy dependence on exports, their economies could suffer. For instance, Vietnam, Bangladesh, and Indonesia greatly rely on their footwear and textile exports. These countries could suffer if China continues to devalue; making its goods cheaper in the global marketplace.
The devaluation actually worked, because several years later, and a pandemic later, China is well on its way to become the largest economy in the world, with analysts saying it will be largest by 2030. The devaluation of the yuan also helped China to be the world's largest goods exporter, knocking Germany off its perch.
China has a long way to go in terms of further developing its services sector, but it is important to note that a stronger currency doesn't necessarily mean a strong economy. What matters is productivity of the local businesses, culminating to the performance of the economy!
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Forex World corporate office is based in Sandton, with a branch network that allows it to support customers in and around the major cities of South Africa. Forex World are currently expanding countrywide impression, into Durban and other key cities in South Africa.
Forex World offers exchange services to more than 20 of the world most utilized currencies; done to ensure that travellers and organisations all around are helped, gaining admittance to numerous monetary forms as conceivable at one spot.
Among the variety of numerous items, Forex World likewise offers the Corporate Travel Float (the Omnibus Facility). This is for circumstances whereby an organisation has numerous delegates. Forex World is allowed to endorse application for Omnibus Facilities up to R20 million each year for distribution at the watchfulness of the organization.
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Sources: WTO, World Bank, IMF, Investopedia
