Valuing China: Chinese Currency

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.