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Explained: What is currency manipulation and how China's move can impact India

File photo: US dollar and Chinese Yuan notes.  Photograph:( Reuters )

WION Web Team Beijing Aug 06, 2019, 04.35 PM (IST)

China's decision to lower the value of renminbi has angered the United States which has accused Beijing of manipulating its currency. Washington's sudden move came the day China allowed the yuan to fall below 7 to the dollar for the first time in about a decade - provoking US President Donald Trump's ire and sending global equities markets diving into the red.

So what exactly is currency manipulation? To put it simply, a country indulges in currency manipulation when it artificially lowers the value of its own currency. In turn, it lowers the cost of its exports to gain a competitive advantage.

The move will help maintain the attractiveness of Chinese goods, and keep its exports at a favourable prices.

The US called it an unfair practice; in fact Washington has threatened to impose more tariffs on Chinese goods from September 1. But Beijing said it lowered the value of its currency to balance out the adverse impact of high US tariffs on Chinese exports.

On the positive side, currency devaluation strengthens the sales and revenue of domestic industry. But on the negative side, due to high import cost, people may choose not to buy imported goods, which could lead to inflation or sometimes monopoly in the local market.

An immediate impact of currency devaluation by China could be felt by Indian exporters. If Chinese exports become more attractive, it will make it that much more difficult for Indian exports.

The Indian rupee is already trading higher, at 70.80 per dollar.

Some Asian countries could follow suit by lowering their own currencies which would potentially affect the global supply chain.

The second major battle between the US and China - amid the trade war - has sapped business confidence and undermined both countries' manufacturing sectors just as the world economy's slowdown worsens.

Activity in the US service sector hit a three-year low last month, survey data showed Monday, confirming a step-down in US economic growth.

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Some Asian countries could follow suit by lowering their own currencies which would potentially affect the global supply chain