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How Yuan Can Boost India Growth

901 words - 4 pages

"This is the way the new world begins Not with a bang but a whimper." (With apologies to T S Eliot)The long-awaited change in the Chinese currency, the yuan, happened on Thursday. Not over the weekend, when all markets would have been closed, but just an hour before the US market opens. Subtle.The amount of the revaluation, 2 per cent, was of a magnitude that would not affect the price of anything, let alone tomatoes.Estimates of the undervaluation of the yuan ranged from about 10-15 per cent to about 40-60 per cent. Of course, there were some who said that China should not move from a fixed exchange rate, but even these experts felt that the yuan was undervalued -- and/or that the Chinese had been playing the mercantilist trade policy for a bit too long.The world is abuzz with the consequences of this whimper for growth rates, stock prices, commodity prices, interest rates, central bank reserve compositions, in Beijing, in Hanoi, in Brazil, in India, in the United States.Surely one of the most important financial market events since. I happen to think that this whimper is more momentous than either the East Asian financial crisis of 1997-98 (affected just a handful of countries), or the Black Wednesday in September 1992 (just the pound) or even the Plaza agreement (just the Western economies).This little reval affects the entire world -- developing economies, those wanting to develop, and the developed economies. If ever proof was needed that a Chinese revaluation was necessary, the reverberations around the world are so.There were several China apologists arguing that a reval was not necessary; and/or that a flexible exchange rate would bring about a large devaluation of the yuan! No wonder economists are like Hindu gods -- multi-faced and multi-handed!There is a premise behind the belief that the 2 per cent reval is not the end, not even the beginning of the end, but rather the end of the beginning. The assumption is that the Chinese government will not for a second think that they have done enough to satisfy the demand of the Americans (actually the entire Western world and most of the developing world) to depeg their currency from the US dollar.They will not for a moment think that now it is business as usual and Unocal is in the bag. They will not for a pal (the smallest unit of time) think that the US Congress will be satisfied with their fleeting reval and will no longer impose China-specific tariffs.What will it take to satisfy the world that a fair yuan/$ exchange rate (approximated by a free exchange rate) is the...

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