Yuan revaluation: Who stands to gain?

China is all set to revalue Yuan amid mounting US pressure. But will it benefit India?

Anil Kumar Satapathy

First there was hope, then awe, followed by a pat. But the Dragon knew what was coming in her way. In January 2009, the US Treasury Secretary Timothy F Geithner accused China of manipulating Yuan (Chinese currency) to make the country’s exports more competitive. He was soon joined by President Barack Obama who expressed his frustration over Beijing’s currency policy. Now, as the US Treasury is set to come out with its twice-yearly report on the currency policies of other countries in April, there is a growing speculation that it may label China as a “currency manipulator” – which will result in the US levying duties against US imports of goods from China. According to some, Yuan (also known as remnibi) is undervalued by as much as 40 percent. The western countries, especially, the US, have alleged that China by not revaluing its currency is hurting the global markets. This causes an unbalanced world economy and an advantageous position for China to maintain its share in world trade. However, Chinese Premier Wen Jiabao, came out in defence of Yuan. Notably, in January this year China sped past Germany as world’s top exporter. The Dragon has exported goods worth a staggering USD 1.2 trillion in 2009. What is devaluation? Devaluation is lowering of the value of a country`s currency within a fixed exchange rate system and keeping it at fixed rates irrespective of the fluctuations in the global currency market. The lowering of a currency helps the nation export more vis-à-vis other countries. For example, suppose one dollar is equal to Rs 100. And if the rupee was devalued by 10 percent, the equation becomes USD 1 = Rs 110. This means Rs 10 extra for exporters for every single dollar they earn in the global market. Many countries, including India, had in the past undervalued their respective currencies owing to various reasons. China had brought some flexibility in its currency regime in 2005 following US pressure but as the global financial crisis deepened in 2008, it repegged the yuan to the US dollar to boost Chinese exports and revive the economy. According to an estimate, China let the yuan to appreciate by about 20 percent between 2005 and 2008. Why the West Cries? The present US-China barb will not be fully understood without having a look at the complex relations these two super-powers share with each other. The US is China`s biggest export destination, accounting for over a third of its global exports. This apart, China needs US investments and technological expertise. China has maintained its reputation as a cheap product maker. The US, which has a huge consumption market, is important for Chinese economy’s northward journey. On the other hand, China is US’ biggest lender. It holds USD 889 billion worth of US government bonds - creating a potentially potent weapon. If China decides to dump the holdings, US dollar will collapse, plunging the world’s largest economy into deep chaos. This, however, is less likely as it would hurt Chinese investors’ also. Though the Yuan revaluation may not help generate jobs in US, it could prompt other countries (especially Asian) which now hold their currencies in check to compete with China, say trade experts. Therefore such a move is necessary for opening up Asian such markets for American exports. The financial crisis has only added fuel to fire. The cost sensitive businesses are tempted to use the cheap Chinese goods (eg, steel, tyres, etc), which hurt the domestic companies in the US. Other western countries, which are witnessing a fall in domestic consumption, also want Yuan revaluation, which would boost their exports as well. Sino-American relations are also governed by political issues. In recent times, the US has sanctioned Chinese steel and tyre exports to the country putting heavy dumping duties on them. The US has also in the recent past blocked China National Offshore Oil Corporation’s takeover bid of the California-based Unocal Corporation on grounds of energy security. The experts’ take The argument on remnibi revaluation has been heating up among economists. There has been almost a consensus for a rise in yuan value. “We have a world economy which is depressed by China artificially keeping its currency undervalued,” Nobel Prize-winning economist Paul Krugman has said in an interview, adding that China’s currency policy has a “depressing effect” on economic growth in the US, Europe and Japan. He even claimed that the global economic growth would be about 1.5 percentage points higher if China stopped restraining the value of its currency and running trade surpluses. Morgan Stanley Asia chairmen Stephen Roach, however, choose to differ with Krugman. In fact, he warned that the call to push China to allow a stronger yuan is “very bad” advice and that increased Chinese spending is a better way of reducing trade imbalances. Will it benefit anyone? It is quite well known that US would not benefit directly from Yuan’s revaluation – which to some extent is certain now. Instead, it will be the major emerging countries like Brazil, India and South Korea, the main competitors of China in the exports sector, which will benefit. The Asian nations could ill afford to let their currency to appreciate for fear of losing their export competitiveness to Chinese firms benefiting from the yuan`s government-enforced stability. Neither they can champion their cause, nor can they anger their giant neighbour. A significant up-valuation of Yuan will also rob China of its “cheap labour” advantage. This may nudge the MNCs – who were the backbone of Chinese electronic goods export to US – will likely shift base to other Asian countries including India. The Chinese seem to be well aware of the implications of such a move. So they will most likely continue to defend Beijing’s artificially created stability.