- China is an export oriented economy. On the other hand US is more likely based on consumption based economy.
- Currently, Chinese economy is witnessing slowdown due to dip in exports.
- During 1997, most of East Asian countries witnessed financial crisis. This led china to devalue its currency so that it can encourage the exports.
- During 2005-06, china had come back to market-determined exchange rates, but later it shifted to manage exchange rates.
- China has been demanding that Yuan be made a global currency at IMF.
- But IMF supports the free market economy. In china Yuan was managed by its central bank. Therefore IMF rejected its demand to make Yuan in SDR.
Why would china want Yuan to be included in IMF?
- When a currency becomes part of special drawing rights (SDR), then that currency is hold by central bank of every country as a part of their FOREX.
- This makes Yuan a hard currency.
- Once its currency becomes a part of SDR, then it opens new opportunity for china to play a major role in IMF.
Impact of devaluation of Yuan on world
- By devaluating its currency, china will become competitive in world market by exporting their surplus production at cheaper rates. It will dump its good in the international market and affects the export of other economies.
- China is the second largest economy in the world. If its currency becomes weak then US dollar will strengthen. If this happens, US economy will not be competitive and its exports will be affected. If US economy gets affected, then it will affect the entire world.
- Devaluation of Yuan will create currency war among nations to become competitive in international market.
Impact on Indian economy
- Depreciated Yuan would flood the Indian market with Chinese goods. This move make china made good more cheaper.
- Depreciated Yuan would help china to move closer for making its currency as reserve currency at IMF.
- China is a major exporter of steel in India. The cheaper import will lead to problems for the domestic steel industries.
- It will affect the Make In India initiatives by attracting foreign investments.
The china’s financial crisis might have its own advantages and disadvantages for India and rest of the world. But it also provokes other nations to depreciate or devalue their own currency to protect their exports. It will create a currency war among nations to become more competitive in International market. India can take measures to protect its domestic manufacturing industries from competitive Yuan by imposing more duties on imports from china. In India there are labour intensive sectors like textiles, steel, gems and jewelry etc. which are vulnerable to cheap imports. With respect to china, we import round $60 billion and export just around $10 billion. Hence protective measures need to be taken.