Pegging is the process of stabilizing a particular currency.Yuan is a fixed currency and it is pegged against the US dollar.The six month high for Yuan is 6.83 and the six month low for the currency is 6.82.The people's bank of China has successfully managed to keep the yuan between these levels.So how is pegging helping China?
China undervalues its currency,this makes the Chinese exports to the US cheaper.This has been one of the main reasons the Chinese manufacturing industry has flourished.In India we often come across reports of the textile industries being badly hit due to Rupee appreciation,This is because the Rupee is not a fixed currency(however Nepalese rupee is pegged against the Indian Rupee),R.B.I enters the currency markets generally to reduce the volatility,to reduce the losses for the importers and the exporters.The RBI perceives that long run equilibrium is different from the actual values.However in the past we have seen RBI allowing the Rupee to appreciate and depreciate up to10% over a period of 12 months(we have seen the rupee fall from 39 to 44 in 2009),and I am of the view that these actions are quite justified in case of a developing nation,comparing the fluctuations in the Yuan and Rupee it can be said that RBI has not been as aggressive as the People's bank of China.We have to appreciate RBI for letting the market forces determine the movement in the Rupee.
Having said that we have to understand the fact that a fixed Yuan actually benefits the exporters in China,and therefore may have a negative impact on the exporters in India.For instance when it comes to pricing we can say that the Chinese textile industry has an upper hand over the Indian textile industry because of the fixed Yuan and the floating Rupee.Unfortunately Indian government has always been in the back foot when it comes to raising its voice against China.
For a brief period the Yuan was allowed to appreciate,and during this period the Yuan appreciated by 20%.Most analysts today are of the view that Yuan is undervalued by 10%-50%.So if the central bank stops pegging we can say that the Chinese manufacturers will be forced to raise their prices in proportion with the appreciation in Yuan.
Recently many senators in the US congress have been protesting against this policy of China.A group of senators in the US are planing to bring in a legislation which would impose taxes on Chinese imports.Increase in Chinese imports has made life difficult for the local US manufacturers,this legislation should certainly help the US manufacturers compete with their Chinese counterparts.However any aggressive step taken against China will have a negative consequence on the US considering the fact that China is currently sitting on 2.4 trillion of foreign reserve,most of which is US T-bills.This is one of the main reasons why the recent statements by the treasury secretary T.Geithner does not sound threatening towards China.It is going to be interesting to see if US is going to accuse China for being a currency manipulator considering the fact that China is currently having T-bills worth trillions.Let us also not forget that the US consumers are the major beneficiaries of these low priced Chinese products.So any action against China can potentially affect the US bond market and the US consumers.
Coming back to China-to prevent the Yuan from appreciating the Chinese central bank sells Yuan.The Chinese central bank may increase the supply of Yuan to prevent it from appreciating,this may in turn lead to a rise in inflation in China.Looking at the broader picture we can actually say that the Chinese central bank is helping the Chinese manufacturers sell their products in the US markets,but what is unfortunate is that these benefits does not get transferred from the employers to the employees.Workforce in China continues to be exploited to meet the rising demand,and we come across cases of workforce exploitation in China on a regular basis.
Considering all this it should be interesting to see how the US and China deal with this issue.
Thank,intresting issue to be watch. very nicely potrayed balli...i believe us will not take immediate action even they willing to do so Bcoz dragon will eat them with selling T-bills.
ReplyDeletei have question, Will yuan be in position to replace us dollar as international benchmark for global trade?
to early to comment bout dat
ReplyDeleteHey Balli, a question:
ReplyDeleteWhy do we talk of India Overtaking China by 2020? Just 10 years from now...2020. Some facts about both the Country:
India is the 12th largest economy in terms of the exchange rates, China occupies the third position. Compared to the estimated $1.209 trillion GDP of India, China has an average GDP of around $7.8 trillion. In case of per capital GDP, India lags far behind China with just $1016 compared to $6,100 of the latter.
By looking at these figures on what basis can one say India will overtake.
I wanted to know, What does India have which will make India outstanding?
Aashish S
I doubt if India wud overtake China by 2020....The Chinese foreign reserve is 10 times the Indian foreign reserve....Besides India has never managed to match the growth rates achieved by the Chinese economy....it is definitely goin to be difficult to compete with the low priced Chinese exports
ReplyDeleteThere are very few areas where India seems to be doin better than China....We have a better regulatory framework when compared to China(so we can say that the foundations/pillars of our economy is stronger than tht of China)& of course I can say this with certain amount of confidence tht the growth rates posted by the Indian service sector can never be matched by the Chinese....To sum it up,it's gona b a difficult task to overtake China.