How yuan can boost India growth

Essay by vyasdhaval August 2005

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"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 --...