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Yuan – the next global currency?

Last Updated: Saturday, July 3, 2010 - 17:01

Reema Sharma

The decision of the Chinese Central banks to let the Yuan appreciate vis-à-vis the dollar reflects a new found economic confidence taking root in Beijing’s strategic thinking. Just a day ahead of the G-20 summit opening on June 26, Chinese yuan rose to its strongest level against the US dollar since December 2008. This token appreciation bears testimony to the fact that China is still committed to decontrolling the yuan. At least China has proven its stance that the appreciation yields relevance in principle.

The Yuan appreciation has great significance, both political and economical, post the economic downturn. At a time when the entire world was jostling with recession, China emerged as one of the strongest economies, if not the strongest, last year and grew by a thumping 9.1 percent in 2009. Macro economic researchers in China expect a growth rate of about 10 percent for 2010. It is against this backdrop, the Communist government signals changes in its conservative currency policy. This shift, many expect, would have cascading effects on global trade. It will also define influence of the Chinese currency.

Chinese Yuan has been the most talked-about issue in the G-20 summit, and global economic policy makers have been very edgy over the value of the Chinese currency. China has time and again faced the allegation for keeping its currency artificially low. This has given the Chinese exporters a competitive edge over its rival exporters and thereby a stimulus to its exports-driven economy. For many countries the Yuan has become an obstacle to global rebalancing, and the Chinese economy is nothing less than an eyesore for its competitors. Beijing`s decision to “free” the Yuan would bring it in line with market forces, and a stronger currency would inevitably boost spending in the world’s fastest growing economy. It would also result in an increase in demand for foreign goods, giving a much-needed boost to the global recovery.

Even during the economic slowdown, China’s foreign trade has remained more or less stable. The government has given huge concessions to the exporting community to help it overcome the crisis caused by demand destruction in advanced economies. That the export rebate rate in China zoomed seven times since June 2008 shows how the export sector is being supported by the government. This government intervention of course gave Chinese exports an upper hand in the time of crisis.

However, post-slowdown the growth has stagnated. For a sustainable recovery of the global economy, each national economy should recover from effects of the meltdown. The G-20 countries fear that during this time of recovery cheaper Chinese goods would blight the indigenous goods of other countries which are still struggling with many challenges. Therefore, a revaluation of currency has become a must in order to check the export rate of Chinese goods.

No pressure please

The US has mounted a lot of pressure on China to revise its exchange rate policy. However, China has quoted trade figures to fight the pressure from US and all the G-20 countries, saying its imports are also on the rise. During the first quarter this year, US exports of goods to China increased about 50 percent year-on-year, compared with less than 20 percent for other regions.

The Chinese authorities have also made it clear that they would not bow down to international pressure. Key agency heads have stated that the change in the Renminbi exchange rate, the deciding factor is the internal dynamics of the Chinese economy rather than pressure of any individual country or international organisation.

In the short-term, it would appear that the Chinese exports might come down. However, a long-term analysis has a ringside view in the frame. China has a fair chance to emerge as the strongest economy in the near future given the fact that US economy is more in a state of doldrums. Yuan appreciation is a huge step towards convertibility. Decades down the lane, Yuan might replace the medium of exchange. The recent China-Argentina currency swap agreement, insisting that Argentina is able to pay for imported products from China in RMB is a step towards this greater convertibility. And with a stronger Yuan the Chinese imports would escalate, which would also mean there would be greater buying power for the country.

First Published: Saturday, July 3, 2010 - 17:01

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