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Thread: 2015 Week 33 - Devaluation of the Chinese Currency

  1. #1
    Pompous Ass Hillbilly GregoryHouse's Avatar
    Join Date
    Oct 2008
    North Carolina

    Default 2015 Week 33 - Devaluation of the Chinese Currency
    In a surprise move, China announced this week devalued its currency, the yuan, relative to the dollar.

    The move, done by adding supply of yuan to the global marketplace, is a step towards giving market forces more influence over Chinaís tightly-controlled currency. It will help Chinese businesses who do business in foreign countries like the United States by making their goods less expensive here. And a more free-floating yuan is also more likely to gain the elite status of global reserve currency, a goal Beijing badly wants to achieve.

    How Chinaís currency devaluation could raise prices in the U.S.

    Chinaís currency devaluation could affect the everyday lives of average Americans, from the cost of entertainment to the price of milk.

    China devalued its currency for the third consecutive day Thursday, a drop of 1.1% from Wednesday and collectively the largest drop in decades. The devaluation has caused turmoil in markets all over the world this past week due to fears of a global trade imbalance and currency wars.

    But while the naysayers may be overstating the case, itís worth noting that Chinaís currency devaluation doesnít just have a macroeconomic impact but could also affect the everyday lives of average Americans, from the cost of entertainment to the price of milk. While prices in the U.S. may fluctuate for a number of reasons, they could also be impacted by currency movements in China.

    Hereís how this could happen.
    When the Chinese yuan is devalued, it costs a Chinese consumer more in the local currency to buy an American product or service since each yuan now buys fewer dollars. But even though the price has gone up, local wages remain the same, making it more difficult for the Chinese consumer to make the purchase.
    Take a company like Netflix NFLX -0.27% as one example, which is gearing up to enter the Chinese market. To compete with local streaming services, including a new venture by Chinese ecommerce giant Alibaba BABA -0.47% , the company will have to offer competitive pricing to attract subscribers, putting pressure on its margins in China. This impact is worsened by a weaker yuan, which would effectively make Netflix more expensive for local viewers and force the company to lower prices even further to gain traction.
    Lower profitability from China might then require Netflix to raise its prices in the U.S. to boost its bottom line. But higher pricing could also lead to a loss in subscribers, which would result in analysts downgrading their projections for the streaming video provider. That would depress the stock price.

    Now consider the owner of a company that provides machine parts for a milk processing plant, and who likes to watch Netflix. While the owner, who makes $200,000 a year, may not care about a $1 per month increase in his online entertainment costs, he would care about a decrease in the value of his mutual fund that holds Netflix stock, which could amount to thousands of dollars. To make up for this loss, he in turn would have to raise the prices of his machine parts, which would then make it necessary for the company providing milk to increase its prices.

    And thatís how the currency devaluation in China can ripple through the global economic ecosystem to ultimately impact not just how much you pay to watch House of Cards, but the price of a gallon of milk on your local supermarket shelf.

    I don't worry about falling skies as much as I worry about low ceilings.

  2. #2
    Banned b381l's Avatar
    Join Date
    Sep 2010

    Default Re: 2015 Week 33 - Devaluation of the Chinese Currency

    China has a currency.....who knew. They got all our dollars, why do they need a currency.

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