China decides on ending Yuan peg

Praveen Bajaj — Mon, 21 Jun 2010 13:37:58 +0000

Facing growing pressure from around the world, The People’s Bank of China (PBOC) announced on Saturday that it is prepared to allow the country’s currency to float more freely against the dollar and other foreign currencies. The bank said that “this step is in view of the recent economic situation and financial market developments at home and abroad, and the balance of payments (BOP) situation in China”

This step by the Chinese government would end the two-year Yuan Peg to Dollar (6.83) and will take the pressure of Beijing at the G20 meet at Toronto next week. It seems that the Chinese will not strongly revalue its currency because the very next day in a follow up statement it ruled out a one-off revaluation and said there were no grounds for a big appreciation of Yuan. However, the revaluation will have a dual impact on Chinese economy

On one hand it would make the Chinese exports expensive for the world market and will benefit exports from other competing countries like India, Brazil and other South East Asian economies
On the other it would make imports cheaper for China and will give the government a strong tool to manage its inflation, increase the purchasing power of the people and resulting in more broad based growth and in turn leading to the establishment of service sector in the country

All and all this move by China is good news for the global economy and other developing countries that are unable to compete with China in terms of exports because of its week currency.

Impact on India

This will ease India’s trade deficit with China and will help Indian exports of textiles, leather products, marine products, engineering products, auto ancillaries more favorable in comparison to the Chinese exports.

The trade between India and China soars closer to the US$60 billion target, India’s trade deficit with China is increasing. In 2009, India suffered a trade deficit of US$15.8 billion against China, while in 2008 the trade deficit was 11.17 billion., thus a stronger Yuan will help in eliminating this deficit and also increase the cost of Chinese imports of electrical machinery and other goods into India and benefit Indian manufactures.

Indian Sectoral impact of China’s yuan move

Its advisable to invest accordingly.

To read our earlier article on Chinese economy click here

Author:Rahul Sonthalia,Research Head, Kredent

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China decides on ending Yuan peg