China’s in trouble

The problem with China’s imports is currently a weak, and getting weaker by the day, domestic demand. Overall, imports have fallen by 18.8% from a year before and fell 20.4% fall in September. China’s has an expanding $61.64 billion surplus. This has happened in large part due to the depreciation of the chinese currency, the yuan.  As a result of the depreciation, imports now cost China more than before. With higher prices comes movement along the demand curve. As seen in the diagram, after the devaluation of the yuan, the prices of imports rise and demand goes down. The rest of the world supply, largely inelastic as a whole since it is such a big entity, remains the same but now costs china more to purchase due to currency value going down.

China faces a completely separate problem in regards to its exports. Due to rising land and labor costs, the cost of making and shipping exports has increased. In this case, the aggregate supply rises as those increased costs cause China to create exports less efficiently at a more costly rate.  The demand curve in this case is fairly inelastic since the demand of the world isn’t crazy sensitive, but will still respond to prices changes. As that supply curve shifts, the world will buy a smaller quantity of exports at relatively the same price.


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