Wednesday, June 23, 2010

The revaluation of Yuan, is it going to set the growth path ahead or will it be the reason for fall?

China is the world’s largest developing economy with highest saving rate(50% of GDP) and forex reserves up to $2 trillion it has been been challenging and growing as a major threat to worlds most developed economies.
It’s been a while from the post recession heated talks about a new currency which could replace dollar, the focus of discussion was always China.The reasons were many why China did not revalue its currency and when you would look back now they all seem more like strategic decisions rather than succumbing to the situations as it seemed before

Here is China back with a boom not only revaluing its own currency but also making the whole world wonder about the reasons and the outcomes.

China which appeared as the biggest lender and savior of the US in the past today seems to be in a role reversal of sorts and now with the picture looking totally upside down we have a lot to discuss and a lot to learn.

The Chinese currency revaluation brought a new news across the world, would it bring positives for most of the world including India it is expected to give a tough time to US economic policy maker to formulate an easy way out.

Across the world the news was taken in different magnitude but in India we know that the stock prices jumped high, the oil prices followed them and than there is no commodity I guess which did not rise after the big news.

So why are the signals being speculated positively in India, What could Yuan’s revaluation possibly lead to?

  • Costlier imports for US largest importer of Chinese goods.
  • Higher cost of debt which US have to repay china(In May 2010, the US amount owes $900.2 billion to China)
  • Will give other nations of world a more competitive edge on their exports( India is one amongst them)
  • Increasing revenues for China on exports and debt interest.
  • Mitigation of the Euro falls as compared to it was before.

    But is their any other side of this picture? do we also have economies which have got tangled into a silk spool of china and going to fall?


shreya srivastava said...

In addition to the above given points-
1)The US asset reserve and T-bonds from US in China will be undervalued. This will effect the Chinese balance sheet.
2)Yuan was undervalued by 40% which makes the US goods expensive in US by 40% and the Chinese goods artificially cheap in the US markets. To bring the Yuan at par it should be increased at 0.35% a day instead of 0.5% a day. Its current value is 1$=6.85 Yuan it should be 1$=4.85 Yuan.
3)It would also encourage China to liberalize ,labour unions ,increase wages and take other steps to raise domestic demand for goods made in China

Anjana Khanduri said...

Everything so far looks straightforward from one direction that is competitive trade policies. But there could be other strong reasons for all this like social political motives which aim at long term gains.

1)It is a well established fact that Yuan appreciation is negligible as of now and in future it may rise, so will countries in south East Asia loose there trust on dollar and trade more in Yuan?

2)Will we see countries buying more of Yuan?

3)Is China’s Yuan emerging as a major threat to US Dollar and its position of globally traded currency?

Esha said...

Due to a fixed exchange rate regime, China is having unfair advantage over other economies because, even though Chinese export competitiveness is high, nonetheless it's currency never appreciates.The advantage being it's exports never suffers as they are always in demand. But the ill-effects of devalued yuan on the world as a whole are:
1. Rising unemployment levels in the economies worldwide including US & Asian economies.
2. Hampered trade competitiveness of these economies.
3. Relatively to yuan Euro appears to be appreciated, hence it's exports become expensive.
4. Moreover,this strategy of China is not in the interests of the market. It is creating global imbalances where some countries are facing rising inflation, unemployment etc...while others like China are not affected at all.

I wonder someday what would happen, if economies start competitive devaluations just like the one happened in 1930s & led to the trade war. If China adopts a flexible exchange rate system then it could possibly save the world from the economic instabilities. Moreover, the problem with China being it's low domestic demand. Hence, China should focus more on increasing it's domestic demand rather than relying only on exports.

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