I have the typical answer:
"A cheaper currency means exports will go up because it's cheaper to buy from us!"
Yeah, sure, but that's obviously full of holes.
Let's have a simple situation:
- We have China (yuan) and America (\$).
- America needs 100 "item" from China every year.
- One "item" costs 1 yuan.
Now, let's say currently (situation A):
- The rate is 1\$:1yuan
- That means America pays \$100 every year.
In situation B, we devalue the Yuan:
- The rate is 1\$:2yuan
- That means America now does one of the following:
- Only pays 50\$ and still gets the same 100 items.
- China basically just lost 50\$ a year. China loses.
- Still pays 100$ but now gets 200 items instead:
- China gets the same 100\$ but is now giving out 200 items instead. China loses.
- Only pays 50\$ and still gets the same 100 items.
So, how exactly would China ever benefit from devaluing its currency? It doesn't make any sense to me, you're literally just giving more exports, you are not getting anything more in return.
The only reason I could think of, is that they actually do think that, in order to stay competitive, they need to sell 2 items for 1$ instead of only 1 i.e. they do think it should be that cheap and they don't want the floating currency price to interfere with what they think should be the correct price for their products.