Most people are probably aware that the US dollar has appreciated against many currencies in the last year or so. One currency that has managed to stay relatively stable against the dollar is the Chinese yuan or renminbi. As a result, the yuan has also appreciated against many other currencies, including all the ones that have depreciated against the dollar such as the euro in Europe and the yen in Japan.
This appreciation of the yuan has been cited as the reason why Chinese export numbers have underperformed as the table below shows. A number of people have put forth the argument that this is the reason why the yuan should be devalued against the dollar in order to give Chinese exports the boost it needs.
The reasoning is that the value of the yuan is too high and therefore needs to be lowered by China to regain competitiveness versus other exporting countries. Since exports is perceived by many as crucial to the Chinese economy, it's thought to be necessary to do whatever needs to be done to make sure that exports are in the best possible position.
| Month | % Change (YoY) |
| Jan | -3.3 |
| Feb | 48.3 |
| Mar | -15.0 |
| Apr | -6.4 |
Source: tradingeconomics
Such a move would have drastic implications on many levels. For instance, the value of the dollar would get another boost and this would help the long dollar trade in the form of, for instance, UUP (NYSEARCA:UUP). On the other hand, it would hurt those who are long the yuan in the form of, for example, CYB (NYSEARCA:CYB).
The export front is not as bad as it looks for China
However, the latest export figures for China are not as bad in comparison to other leading countries. The table below shows the cumulative exports and the year-over-year change of the four biggest exporting countries in the first quarter. The picture looks quite different from this context.
| Country | Exports (YTD 2015) | Exports 2014 | % Change (YoY) |
| China | $513B | $491B | 4.5 |
| Germany | €294B |
€278B |
5.8 |
| United States | $563B | $575B | -2.1 |
| Japan | ¥19012B | ¥17434B | 9.1 |
Germany and Japan have performed the best by posting the biggest increases. However, it comes on the back of the depreciation of the euro and yen and it's not so impressive once that is taken into account. More impressive is China, which still managed to increase cumulative exports despite the appreciation of the yuan.
Furthermore, there are many countries that have seen their exports shrink despite the depreciation of their currency. For instance, Brazil, Russia and India, who together with China comprise the BRIC countries, have seen their exports go down despite their currency weakening. Currency depreciation will not necessarily increase exports. There are many factors that can play a role besides currency exchange rates.
It's also important to note that the first quarter tends to be relatively weak for China due to seasonal factors such as Chinese New Year. Historically, Chinese exports tend to get stronger as the year goes by. This bodes well for China in the months ahead as odds are that even better performance can be expected in the second half of the year.
It's not certain that devaluing the yuan is good for China
There are some who are convinced that China has to devalue its currency because that's what's good for the country. That may be so from their perspective, but there are good reasons to question that belief. The first is that it's important to take into account the overall trade balance with imports and exports and not just exports only.
The table below shows that China's trade surplus is on pace to set a new record in 2015 at over $150 billion so far, which is more than four times the amount last year. This surplus is already far larger than what almost all other countries will be able to achieve in an entire year. It's the trade surplus or net exports that contributes to growth in an economy.
| Month | Trade Balance 2015 | Trade Balance 2014 |
| Jan | $60.0B | $31.8B |
| Feb | $60.6B | -$22.9B |
| Mar | $0.3B | $7.7B |
| Apr | $34.1B | $18.4B |
The reason why the overall trade balance is more important is because increased exports is not necessarily a sign that the economy is doing better. An example can be found in India. A large chunk of what India imports such as crude oil and gold is destined for exports in the form of refined petroleum and jewelry.
When the prices of oil and gold went up as they have in recent years, Indian exports and imports increased. More than they would have under normal circumstances. However, India's trade deficit remained. Even though India was getting more from increased exports, they also had to pay more due to increased prices of imports. They essentially canceled each other out.
Now that oil, gold and many other commodity prices are lower, India's exports and imports are also going down. That's why one should never just look at whether or not a country has increased exports because it can present a misleading picture if imports are ignored. Exports minus imports or the actual trade surplus or deficit is more important in determining the direction of the economy.
Devaluing the yuan will incur costs, but not necessarily yield any benefits for China
China is the biggest importer of many commodities such as crude oil, iron ore, copper and so on. Most of it for internal consumption. If China were to devalue the yuan, it would have to pay more for these commodities. That would do nothing except raise inflation. Not good for China.
At the same time, it's not certain how much a cheaper currency will help Chinese exports. Global demand outside of China is fairly weak and a cheaper currency cannot really substitute when there's a lack of demand out there. Lower prices will not necessarily increase sales.
The fact remains that many countries have seen their exports go down despite their currency depreciating. Even the ones that did grow their exports have not been able to grow them by a large amount. This suggest that the current environment is not conductive to increased exports. If imports go up and exports do not after devaluation, China will only be left with a smaller trade surplus which will hurt growth going forward.
Under these conditions China is better off focusing on its internal market where demand is much better than most places. Cheaper imports is more beneficial than cheaper exports at this point. If China were to devalue, it would have to pay a price and run the risk of getting no benefits in return. While the negatives are certain, the positives are dubious at best. A devaluation of the yuan is not appropriate from this perspective.
Conclusion
There are a number of people out there who expect the yuan to be devalued by China and are short the yuan because of that. However, there are reasons to be skeptical that this will indeed happen. China's overall trade performance is not so bad once you look past the headline numbers. It's actually pretty good in comparison to most other countries out there.
Given the current circumstances in the world, it's better for China to maintain the value of the yuan as that's the path that will yield the most benefit. Shorting the yuan is therefore unlikely to be worthwhile because the current environment simply does not warrant the yuan to be devalued.
original source: http://seekingalpha.com/article/3199596-why-the-chinese-yuan-does-not-have-to-be-devalued-to-boost-exports