Finally, the Chinese Dragon has moved from its stand and has paved the way for a flexible yuan policy. Call it as a move triggered on the back of pressure tactics by Obama-led US or as a precursor move just ahead of the G-20 summit – one thing is for sure that the world economy would benefit to an extent from the potential effects of rebalancing of trade led by yuan appreciation.
Some economists have estimated that the global growth would be about 1.5% higher, if China stopped restraining the value of its currency and running trade surpluses. China has been under a constant pressure from the leading economies of the world to revalue its currency apart from spurring the demand for its goods domestically.
Currently, the crisis-struck US and European economies account as a major exports destination for the Chinese manufactured low-cost goods. At such a time, the appreciation in the yuan policy would allow the US economy in overcoming the hurdles in bringing down its high unemployment rate and falling exports.
My View: Personally, I feel this could well be a knee-jerk reaction by China to revalue its currency just ahead of the G-20 summit to be held in Canada and to temporarily cool down the threats from the US to levy trade tariffs. China might have temporarily de-pegged yuan against the dollar to shift the attention of the leaders away from its currency in the forthcoming global summit.
Ending the Chinese currency’s two-year-old peg to the dollar would render the wage costs of Chinese manufactured goods more expensive, and, at the same time, help boost cheaper exports from other nations to the consumers across the world. It is said that China is set to surpass Japan in becoming the World’s second-largest economy this year.
According to a study by an economist Joseph Francois:
“A 5 percent increase in the yuan’s value against the dollar would improve the overall U.S. trade deficit, at $378.6 billion in 2009, by about a fifth and narrow the U.S. trade gap with China by $61 billion”
Back home, the revaluation of yuan would also benefit Indian exporters since appreciating yuan tends to give an added edge to the price-sensitive apparel exports globally. The export earnings could also witness a spur on the back of recent spell of depreciating rupee from 44.30 a little more than a month ago to around 46.30 currently.
Do you feel this policy stance of revaluing yuan might just be a Chinese stunt?