CHINA’S DIRTY FLOAT

By Hansa Sinha

Today’s post refers to devaluation of yuan by China and its impact on trade law in India. When I first heard about this, I wondered what about renminbi? Isn’t that the currency? At least that’s what I learnt when I travelled to Chinese Taipei for ELSA, and where Hong Kong was a stopover. Well I am right and wrong. Both terms are correct. While renminbi is the official name of the currency, yuan is the basic unit of that renminbi. So you may buy something in China for one yuan or 50 yuan and not 50 renminbi. Read more here.

So having sorted out that confusion, let’s see what has really happened. In 2005 the renminbi took affection to this method called dirty float or managed float system against major currencies. It is a system where the government or the country’s central bank occasionally intervenes to change the direction of the value of the country’s currency. It is generally used as a buffer against an economic shock before its effect. In China’s case, it is widely suggested that the yuan is held at substantially undervalued level to make exports more globally competitive. The yuan’s exchange rate is allowed to fluctuate within a band 2 percent above or below a point set by the People’s Bank of China based on previous day’s trading. If the government wants to control the appreciation of yuan, it sells yuan and buys greenback- a slang term for US Paper Dollars (Wow I am learning lots of new things today).

So on Tuesday (11th August), China set yuan exghange rate at what was 1.9 percent below Monday’s level. It is said to be the biggest one day change in the last decade. The reason for this is that it is believed that since yuan had been rising in relation to US dollar since it has been pegged to it, it had risen excessively. However, it should have fallen as per market forces. Further, since currencies of other developing countries have also fallen, it was hurting the Chinese exporters as their goods exported abroad became more expensive.

Here enters India. In India it is being perceived as the worst timing ever. As far as anti dumping is concerned there are ongoing and concluded investigations of Steel and Tyre against China. This means that India is struggling with cheap imports even in the pre devaluation scenario. With this move of devaluation, the exports of China to India in various product markets will get further cheaper. As far as the Indian industry executives of steel and tyre industry are concerned, the devaluation is being perceived to be creating an alarming situation. Chinese steel imports are said to be at an all time high presently. The share of Chinese imports out of total steel imports is said to be at 30-35% which may increase. Also Chinese steel is already cheaper by around 80$ per tone compared to Indian steel. This can only get worse.

The other main items that Chins exports to India includes, machinery (electrical and electronic), mechanical appliances, organic chemicals, fertilizers, project goods, plastics, iron & steel, imitation jewellery etc. Therefore this hit might be faced by other sectors too. The government of India has on several occasions has made it clear that actions in the interest of Indian producers would be taken. But this sure has created an interesting scenario globally especially in the aftermath of the Greek crisis.

Read more here and here

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