What does 'Revaluation of the yuan' mean?

Question

It was in the news many days back, and I did not understand what it meant. Does everything in the country become cheaper? How does it work?

Answer 1

Revaluation means that the government purposefully has the value of the national currency change versus the significant foreign currencies. Revaluation is usually synonymous with depreciation (since it sounds negative), and the opposite of appreciation; however in this instance, China is allowing the yuan or renminyi to appreciate in value.

This can either be passive (by letting go of controls in the instance of an artifically-supported currency) or active (by buying government-issued securities on the open market, which decreases the supply of these securities while increasing the supply of the currency; or vice versa to allow the price to increase).

Revaluation is something that the U.S. and some other nations have been pushing for, since the very high level of imports means that U.S. businesses have been buying lots of yuan to purchase these imports, and so the yuan should have appreciated much more than it has. Two factors have worked against this natural process: 1) China has pegged the value of the yuan to a basket of other currencies, including the dollar, euro and yen, which makes it very difficult to convert and allows much control over the value, and 2) U.S. dollars paid for yuan usually go right back into the U.S. to buy Treasuries, the most trusted security in the world; as such, the appreciation of the yuan is significantly mitigated.

The U.S. wants this appreciation because it would help make imports from China MORE expensive and give U.S. domestics more of a chance. This however means everything the U.S. becomes MORE expensive. Simultaneously, everything exported from the U.S. to China becomes less expensive. It's ambiguous whether Chinese goods sold in China will change in value.