In the short run, the yuan devaluation will have an impact on people's lives. For example, outbound tourism, imported goods and overseas study could be reduced. But this situation will not last long as decreased consumption is likely to be offset by increased income stimulated by medium and long-term growth. Simply put, in the medium and long term, a moderate devaluation of the yuan will benefit the domestic economy, and the devaluation will not make Chinese poor as some have assumed.

First, the devaluation of the yuan will stimulate and raise overall domestic prices via the pricing of imported goods, and reduce the deflationary pressure China currently faces. At present, the continued decline in the Producer Price Index (PPI) and the soft read on the Consumer Price Index (CPI) shows the economy faces deflationary pressure.

As a result of the yuan devaluation, we will see increased domestic prices of imported goods including commodities, which will lead to inflation expectations that will enhance production.

Therefore, if the yuan devaluation will curb China's consumption of foreign goods and services in the short term, the subsequent increase in domestic prices will have an influence on the growth of China's economy in the medium and long run, which will mitigate the short-term impact of reduced consumption.

Second, the yuan devaluation will also stimulate foreign direct investment (FDI), and help avoid the hard landing in the structural upgrade of China's manufacturing industry. When the yuan strengthened past the level of 8 to the dollar in mid-2006, the yuan's appreciation has rapidly accelerated.

In recent years, while China's FDI inflows have remained stable as a whole, there are some changes to their structure. One is that the proportion of FDI inflows from developed regions like Europe and the US has continued to decrease, while the proportion of FDI inflows from regions like Hong Kong has continued to increase.

The other factor is that foreign investment has fallen sharply in the manufacturing sector, while the role of the services industry has risen.

Taking these two factors into consideration, the yuan devaluation will stimulate foreign investments in the domestic manufacturing industry, which will help promote sustained industrial transformation.

Against the backdrop of the yuan devaluation, increased orders for foreign trade enterprises from overseas clients will help raise overtime pay for employees in the field. In recent years, as a result of rising wages and increasing costs from exchange rates, weakened competitiveness of goods produced by export-oriented enterprises has seriously impacted on their market share in the international market. Considering that most foreign trade enterprises in China apply a salary model that constitutes basic pay and overtime pay, more extra hours will lead to increased income.

Lastly, the yuan devaluation reflects a more reasonable exchange rate against the dollar. There is still room for more devaluation in the future. Under pressure from countries such as the US that have a trade deficit with China, the yuan had appreciated, deviating from a balanced exchange rate. In the post-crisis period, most countries have gone through a wave of devaluation in their currencies, but the yuan rate has remained relatively stable, which has caused the currency to be overvalued.

In addition, the equilibrium exchange rate is also affected by factors like external surplus, fiscal surplus, and gross domestic product growth. Under China's "new normal," changes in these variables have further affected the yuan's exchange rate, further highlighting the problem of the yuan being overvalued. Therefore, future market expectations are that the yuan devaluation will be an on-going dynamic for the currency to reach a level of equilibrium.

Source of documents：Global Times