(VOVworld)- The biggest 3-day devaluation of Chinese yuan since the establishment of the modern forex system in 1994 has shocked regional and global financial markets. The reasons behind China’s devaluation of its currency and its impacts on China are being closely followed by financial observers.

The forex is supposed to be stable to maintain trust among foreign investors, importers, exporters and the public and to stabilize the macro economy. But China devalued its currency to a 20-year low in order to, according to China, respond more effectively to market developments. In the course of three days last week, the value of the Chinese yuan dropped 4.6%. The global financial market was shocked and suspicions of a monetary war have emerged.

Overcoming economic recession, boosting exports

In the world monetary history, the forex tool has been used to counteract economic downturns. China’s economy, the world’s second largest, is experiencing its lowest growth rate in 6 years. China’s exports fell 8.3% this year. Its production is growing more slowly than forecast and so is credit. Experts assume that China devalued its currency to support Chinese exporters and increase the competitiveness of Chinese goods. Money markets are reeling since China devalued its yuan three times. Currencies in neighboring countries like Australia, the Republic of Korea, India and Singapore have fallen roughly 1%.

Efforts to internationalize the Chinese yuan

China’s devaluation of the yuan is said to be part of its roadmap to internationalize its currency. As part of the process, China has asked to be included in the basket of “Special Drawing Rights” (SDR) currencies. The SDR is an international monetary reserve created by the International Monetary Fund (IMF), whose purpose is to supplement global liquidity and whose value is exclusively based on the four most traded currencies — the US dollar, the euro, the British pound and the Japanese yen. China believes that its economy and its renminbi currency are strong enough to be included in the SDR. But in fact, China faces several obstacles to its ambition. Though China has used renminbi to buy 50 billion USD worth of IMF bonds since September, 2009, transactions using renminbi between China and other countries remain modest. Other countries cannot use renminbi to import goods from a third country, or to pay off a foreign bank or a foreign bond investor. Renminbi-denominated bonds are only sold in China by Chinese banks and a small number of multilateral financial institutions.

The devaluation of the yuan reflects the flexibility of the forex mechanism, one of the prerequisites for China to integrate into the global financial market. This year the IMF will conduct a 5-year review of currencies in the SDR basket.

Controversial impacts

Despite gaining some immediate advantages, China is likely to suffer some major negative consequences of its currency devaluation. First is the risk of cash run. The yuan depreciation makes Chinese exports cheaper and stimulates export growth but experts warned of approximately 40 billion USD in capital withdrawal from Chinese market. Fluctuations on the forex market mainly impact the IT, real estate, and financial sectors. In recent years, low global interest rates and tightened domestic credit have forced Chinese companies to seek cheap loans overseas. The total debt of Chinese companies is estimated to be nearly 370 billion USD and the devaluation of the Chinese yuan will increase this debt. China’s real estate market will also be affected because real estate prices depend on the renminbi exchange rates. That’s why, after going to a record low, the Chinese yuan has increased slightly. But the devaluation is expected to boost the Chinese economy, maintain China’s economic growth, generate jobs and empower the renminbi which will help China to realize its diplomatic goals and strengthen its role in the global economy.