The world is going Gaga — not over the female pop singer’s fall at Heathrow Airport because of rather adventurous boots, but over the Chinese central bank’s recent decision to allow the renminbi, or the yuan, “greater flexibility” against a “basket of currencies” (read dollar).
Indian exporters have lauded the step, but many experts feel the concession, if any, is too little and has come too late.
After months of criticism from US lawmakers over alleged Chinese currency manipulation, the move has yielded a mere 0.4 per cent increase in the value of the yuan vis-à-vis the dollar.
Will this have any real effect on India?
“According to some experts, the yuan is undervalued by 20-25 per cent. Announcing the slight loosening of control over their currency is merely deflecting criticism before the G-20 summit in Canada,” said Mohan Guruswamy at the Centre for Policy Alternatives, a Delhi-based think tank, and co-author of Chasing the dragon: Will India catch up with China.
At the onset of the global economic recession in 2008, China fixed its currency to the US dollar. By keeping the value artificially low, it made Chinese goods artificially cheap to foreigners, while making foreign goods artificially expensive to the Chinese.
Thus, Chinese goods retained their attractiveness even in slowdown- and recession-hit countries. And this exchange-rate wizardry led to record profits for many Chinese companies.
According to official US data, China’s $266-billion (Rs 1,233,708 crore) trade surplus with the US in 2008 fell about 15 per cent to (still humungous) $226.8 billion (Rs 1,051,898.4 crore) in 2009.
Had the yuan been allowed to appreciate closer to its intrinsic worth, Chinese goods would have been more expensive and US (dollar-denominated) goods cheaper in China. This would have reduced China’s trade surplus considerably.
Impact on India
Let’s take this logic further. If Chinese goods become expensive following a revaluation of the yuan, will Indian goods become more attractive?
“It’s too early to make an assessment of the impact of the yuan appreciation. The direction and volume of Chinese exports need to be ascertained before we talk about India,” said Ram Upendra Das, senior fellow at the Delhi-based Research & Information System for Developing Countries, which advises the Indian government on trade issues.
Because there are non-exchange rate linked factors at play between Chinese and Indian goods, like product differentiation, Das said it was far from obvious that India stands to gain.
For India to benefit, its exporters must be able to offer close substitutes to the Chinese goods whose prices will rise following the appreciation of the yuan. This may not be possible except in a few cases.
Over a longer term, issues such as infrastructure and procedural simplicity will determine India’s attractiveness as an FDI destination and sourcing location vis-à-vis China.
The bottom line
A currency revaluation by itself will not make China’s exports significantly less competitive or rein in China’s dependence on its export industry.
Before the global crisis broke out, the yuan had appreciated 21 per cent against the dollar between 2005 and 2008, but China’s trade surplus with the US continued to grow at an average of 21 per cent during that period.
Hikes in wages due to sporadic strikes are far from being the norm. There are deeper differences between the Indian and Chinese manufacturing sectors and these cannot be overcome by simple exchange rate changes.
“The simple fact is that China cannot afford to lose ground in terms of exports. In spite of pegging the currency to the dollar, the loss in global demand cost them 22 million jobs in the export-oriented sector. This is something they can ill-afford,” said Guruswamy.
This doesn’t necessarily mean that India cannot achieve its ambition of emulating China in becoming the world’s factory. But for that to happen, many other factors – apart from a rising yuan – will have to play a part.