Implications for currencies pegged to USD of Chinese devaluation? [closed]

Question

I get the general implications that exist for both US-Chinese exports/imports. However, considering that some currencies are pegged to the USD, would there be any effect and if so what?

Thanks

Answer 1

Let's take Lebanon as a country that pegs to the USD and examine the implications of Chinese devaluation on Lebanese imports and exports.

First step is to recognize that what matters for the trade balance is the real exchange rate, not the nominal exchange rate. We need to examine the nominal exchange interrelationships first. The second step is to examine the inflation differential, under different hypothetical scenarios.

Nominal Exchange Rates:

• Since the Lebanese pound is pegged to the USD, if China devalues their currency and exchange rate used to be 100 Renminbi for 1 USD, now 120 Renminbi for 1 USD, by definition (of devaluation and peg) the nominal exchange rate between China and USA will change, but the nominal exchange rate between USA and Lebanon will not.

Inflation:

• Assuming zero inflation, for simplicity, in all 3 countries, then the Chinese goods and services will now look cheaper to Americans and cheaper to Lebanese. In turn, American and Lebanese imports will now look more expensive to Chinese people.

• Assuming China has a 30% inflation rate, while USA and Lebanon have 0 inflation rate, then the fact that the inflation rate differential between China and USA is 30%, while the Chinese nominal exchange rate was devalued by only 20%, implies that in real terms, the Chinese currency (relative to both the USD and Lebanese Pound) has actually appreciated by approximately 10%=30%-20%, leading to Chinese exports looking more expensive to Americans and Lebanese, and American and Lebanese imports looking cheaper to the Chinese.

• Assuming US inflation rate to be zero, and Chinese inflation rate to be 30% while Lebanese inflation rate to be 5%, we are in a situation where the Chinese currency was devalued, as before, by 20% but the inflation differential (25%=30%-5%) overwhelms the devaluation (25%>20%) hence the Chinese Renminbi has actually appreciated 5% relative to the Lebanese pound, rendering Chinese exports more expensive for Lebanese people. Lebanese exports will now look cheaper to Chinese people.