Follow
UpFront/What If | Apr 28, 2010 | 4047 views

Valuing China: Chinese Currency

Indian exports benefit if China lets its currency appreciate

I

t is not always that Stephen Roach, the chairman of Morgan Stanley Asia wants to batter people who don’t agree with him. But Paul Krugman’s remark that China should be forced by the US to appreciate the renminbi is something that has not gone well with Roach. Roach argues that China has a savings surplus but doesn’t feel that all that can be attributed to the depressed renminbi, while Krugman argues that the currency gives China an unfair advantage.

The fact is that the pressure on China to revalue its currency is rising. And experts feel that it is very likely that China will revalue its currency soon. According to the Peterson Institution of International economics, the renminbi is undervalued by 20 to 40 percent. This itself warrants an appreciation of the currency.

 

 mg_25462_india_china_currency_280x210.jpg

 Illustration: Hemal Seth

What if China does revalue its currency? What will be the effect on India?

Currency traders feel that even if we assume that the Chinese currency is undervalued by 30 percent, China is surely not going to revalue it to the same extent. The consensus is that Chinese currency will be revalued by not more than 2 percent for the next year. The US will not be happy with that, least of all Paul Krugman.

But should India be happy about it? That depends on how you look at it. That the Indian rupee will benefit because the Chinese currency will appreciate is probably not true. “I think there will be a contagion effect. If the Chinese currency appreciates then the whole of Asia will get re-rated. And India will be a part of it. We will see our currency appreciate along with China,” says Manis Thanawala of Greenback Forex Services. If a large economy’s currency appreciates then other large economies in that area also see an appreciation. In any case, the Indian currency is on a long-term uptrend. So the short-term appreciation of the renminbi is not something that most currency experts in India are accounting for. If anything, it can only make the rupee rise.

One of the biggest assumptions behind that statement is that the RBI will maintain its ‘no intervention’ policy in the forex markets. So, generally, it is assumed that a 2 percent appreciation in the Chinese currency will lead to a 1 percent appreciation in the Indian rupee. The appreciation of the currency by around 30 percent can safely be declared as impossible.

Even after one accounts for the slight appreciation of the rupee, some sectors in India will benefit because China will be a slightly more expensive place from which to source materials. Ajay Sahai, director general, Federation of Indian Export Organisations, feels that Indian exports that will benefit the most would be textiles, leather products, marine products, engineering products and certain bulk chemicals. “A pegged currency [like the renminbi, which is pegged to the US Dollar] is like a subsidy to the domestic exporters. The Indian industry would like China to allow the yuan [renminbi] to float free like the rupee,” says Anjan Roy, economic advisor, FICCI.

But don’t expect China to sit still. Biswajit Dhar, who works with the Delhi-based Research and Information systems for Developing Countries (RIS), feels that China might resort to dumping its products or selling them at artificially low prices. He also feels that the high transaction costs and low infusion of technology will not allow India to take full benefits of the revaluation. “In the immediate term, government could reduce transaction costs. For example, the cost of moving goods to ports from one part of the country to another. In the medium term, there should be clear policy to infuse technologies and improve efficiency,” says Dhar.

 

This article appeared in the Forbes India magazine issue of 30 April, 2010
Like this article? Subscribe to Forbes India
Just give us your mobile number and we will get in touch with you
Post Your Comment
Name
Required
Email Address
Required, will not be published
Comment
All comments are moderated
 
“ There are no comments on this article yet.
Why don't you post one? ”
Most Popular
Insta-Subscribe to
Forbes India Magazine
For hassle free instant subscription, just give your number and email id and our customer care agent will get in touch with you
OR
click here to Subscribe Online