Author: Nachiket Nishant, M.A in Politics and International Relations
The Chinese economic growth has been slowing down for the last two years. China has an investment and exports-driven growth model, and now it seems this model is exhausted. The controlled Chinese currency and its link to US dollars may have resulted in appreciation of yuan, but in reality it should have been devalued. However, it is not the first time that a country has devalued its currency by 2%. For example, last year, the euro has dropped 18% against the dollar and Japanese yen by 22%. The difference is only that these currencies are driven by market forces, and adjust accordingly.
China’s long term goal
China is eyeing for dominant position in global financial market. Currently, only euro and US dollars have international significance in international trade and financing due to various reasons. China wants yuan to have a similar sway in global trade, at least in Asia. To realize this dream, the Chinese leadership must adhere to free market economy, and let its currency to fully driven by market forces.
Yuan still has to travel a long road to become a global reserve currency. The controlled economy and interventionist policies practiced by Chinese government must go away in order to become a reliable global currency. China wants to control its domestic economy and its currency, but at the global level it wants to create yuan as a global currency. The tight control on its currency had helped China in the past and it was the reason, Chinese economy was not hit by Global Financial Crisis 2008. But, the situation has changed as US economy is growing at a steady growth rate; the Chinese economic growth rate is moving a little towards South. It seems that there is an opposite correlation between the two economic powers.
Other countries still hesitate to use yuan as a reserve currency. In order to become yuan as a global reserve currency, China may have to liberalize its domestic economy in the long run.
Just last week, International Monetary Fund said that renminbi (yuan) was not ready for inclusion in the basket of currencies the IMF uses for special drawing rights. Currently, only US dollars, euros, yen and pounds have this privilege.
Overall, the cheaper currency will trigger the inflation button in China, and the companies that owe money in dollars will be hard hit. So, it might start a new set of problems in Chinese economy, but this move will surely strengthen the Chinese exports.
Impact on India
- It may possible that Reserve Bank of India will be forced to further slash the interest rates. Probably, it may hurt the foreign investors and may see further fall in Indian rupees. There was a sentimental effect on the Indian currency as rupee’s value further fell to 64.26 against the dollar.
- India won’t be affected by deduction of yuan but, it can cause havoc in future if yuan depreciation becomes a trend.
- The Chinese devaluation of its currency is signaling out a problem in their economy. Their growth has been slowed down and exports have fallen. The positive growth in US economy may also further slowdown the Chinese economy. India can benefit from this confusing situation if the economic reforms under the new government will be accelerated.