I was wondering how China managed to keep its currency constant and here is my research on it.Discussing about china the current foreign exchange is 1.33 trillion $. India’s foreign exchange reserve currently is 206 billion $ (embarrassed smiley). The comparison is not to belittle India’s achievement but to highlight the China’s surge. (Recently there was an IPO of petroleum China whose market capitalization was more than the whole Indian GDP :-0)
I was quite surprised with my research. I earlier thought that China still has its currency pegged against the dollar but since 2005 yuan has been steadily appreciating against the popular currency ($). But before 2005 China had a simple policy which I would insist the Indian Govt. to follow as China is at least 20 years ahead of our country. In that case an Indian floating currency should be there only in the year 2025.
Let’s see how China rose to such great height (that it is now) using a simple weapon – fixed currency.
Here is the recipe : a large manufacturing facility and power to mobilize millions of people at that facility to produce everything. Everything and Anything here implies any damn thing that the foreign country needs. Be it Razors, batteries, haircombs to computers, lazer guided missiles (hope everyone knows where Pakistan got its nuclear carriers from). Once that is done mark the price as cheap as possible so that all the countries flock to your country to buy these things. You can have JVs with bigger companies so that any technical knowledge you lack can be filled up. Build huge SEZs (Special economic zones) and give tax benefits to all those big multinationals.This was simple..any communist country could do what China had done but that is not where the genius lies. The ingenuity of Chinese govt. was in keeping the yuan rate constant. It is obvious that when you are exporting so much outside you are bound to gather lots of foreign currency. At that time America was the biggest importer of Chinese goods (it still is – go to any store in US and the textiles, toiletries and toys will be from china). They exported so much to the USA that the currently the trade deficit between US and China stands at a staggering 238 billion $ (trade deficit means that China exports 238 billion $ worth goods to US more than the US does to china)
So what to do with the extra money that is pouring in the country. Had china did nothing about the inflow of money its currency would have appreciated and its good would have become non competitive (India would have jumped on the economic scenario sooner in that case). But it did exactly what a chess player would do when he is in a fix. It found a way out through spending that extra cash to buy foreign currency.Now that is a tricky job. How would someone buy foreign currency. It is not possible to go to some American exchange and buy thousands of billions worth of American dollars. So instead it started buying US govt. bonds and US stocks. The end result was that China kept profiting from its undervalued currency and US people had a false sense of security with its stocks rising
Also the Chinese economy had to run parallel to the US. It means the yuan interest rate has to be kept in tandem with the dollar interest rate so that when the dollar rises the yuan also rises and when it falls so does the yuan.
But something happened in 2005 which tried to turn the world economy. China announced that it is going to make its currency free floating (upto some extent). As you can see from the graph below (last 5 years) suddenly the Chinese yuan started appreciating
In comparison here is how the Indian Rupee fared against USD
As you can see from the graphs, Indian Govt. never had any plans in place to control the INR which does not bode well for Indian Economy and exporters.
Thus on the exchange rate side, Chinese policy has always been reactive to US policy. From a high of 1.5 yuan to a dollar in 1979, the yuan, falling steadily against the dollar, has been fixed at 8.28 to a dollar since 1995 and remained unchanged through the 1997 Asian financial crisis, the 1998 and 2000 US recessions when pressure to further devalue the yuan was resisted by China. And now it is relatively a free flowing currency but that is not due to the sudden conscience upheaval of the Chinese mind but because the threatening from the US to impose economic sanction on the country if it does not toe the global line. Surprisingly there is another lobby which moots for the Yuan to be kept undervalued as much as possible to sustain global commerce and they believe that an appreciating Yuan is dangerous to the health of the world (their point of view might take another mail to explain).
It is estimated that the Chinese currency is still undervalued by 40%
Indian Govt. has to adopt the Chinese policy if it wants a growth rate which can throw it into the Superpower league. India is currently a developing country and before the development phase gets over we need to make as much cash as we can (as the saying goes Make hay while the sun shines and the sun is surely shining). I think maintaining INR at this rate is the only method how we can stay competitive and I hope Govt. soon comes to its senses.
I was quite surprised with my research. I earlier thought that China still has its currency pegged against the dollar but since 2005 yuan has been steadily appreciating against the popular currency ($). But before 2005 China had a simple policy which I would insist the Indian Govt. to follow as China is at least 20 years ahead of our country. In that case an Indian floating currency should be there only in the year 2025.
Let’s see how China rose to such great height (that it is now) using a simple weapon – fixed currency.
Here is the recipe : a large manufacturing facility and power to mobilize millions of people at that facility to produce everything. Everything and Anything here implies any damn thing that the foreign country needs. Be it Razors, batteries, haircombs to computers, lazer guided missiles (hope everyone knows where Pakistan got its nuclear carriers from). Once that is done mark the price as cheap as possible so that all the countries flock to your country to buy these things. You can have JVs with bigger companies so that any technical knowledge you lack can be filled up. Build huge SEZs (Special economic zones) and give tax benefits to all those big multinationals.This was simple..any communist country could do what China had done but that is not where the genius lies. The ingenuity of Chinese govt. was in keeping the yuan rate constant. It is obvious that when you are exporting so much outside you are bound to gather lots of foreign currency. At that time America was the biggest importer of Chinese goods (it still is – go to any store in US and the textiles, toiletries and toys will be from china). They exported so much to the USA that the currently the trade deficit between US and China stands at a staggering 238 billion $ (trade deficit means that China exports 238 billion $ worth goods to US more than the US does to china)
So what to do with the extra money that is pouring in the country. Had china did nothing about the inflow of money its currency would have appreciated and its good would have become non competitive (India would have jumped on the economic scenario sooner in that case). But it did exactly what a chess player would do when he is in a fix. It found a way out through spending that extra cash to buy foreign currency.Now that is a tricky job. How would someone buy foreign currency. It is not possible to go to some American exchange and buy thousands of billions worth of American dollars. So instead it started buying US govt. bonds and US stocks. The end result was that China kept profiting from its undervalued currency and US people had a false sense of security with its stocks rising
Also the Chinese economy had to run parallel to the US. It means the yuan interest rate has to be kept in tandem with the dollar interest rate so that when the dollar rises the yuan also rises and when it falls so does the yuan.
But something happened in 2005 which tried to turn the world economy. China announced that it is going to make its currency free floating (upto some extent). As you can see from the graph below (last 5 years) suddenly the Chinese yuan started appreciating
In comparison here is how the Indian Rupee fared against USDAs you can see from the graphs, Indian Govt. never had any plans in place to control the INR which does not bode well for Indian Economy and exporters.Thus on the exchange rate side, Chinese policy has always been reactive to US policy. From a high of 1.5 yuan to a dollar in 1979, the yuan, falling steadily against the dollar, has been fixed at 8.28 to a dollar since 1995 and remained unchanged through the 1997 Asian financial crisis, the 1998 and 2000 US recessions when pressure to further devalue the yuan was resisted by China. And now it is relatively a free flowing currency but that is not due to the sudden conscience upheaval of the Chinese mind but because the threatening from the US to impose economic sanction on the country if it does not toe the global line. Surprisingly there is another lobby which moots for the Yuan to be kept undervalued as much as possible to sustain global commerce and they believe that an appreciating Yuan is dangerous to the health of the world (their point of view might take another mail to explain).
It is estimated that the Chinese currency is still undervalued by 40%
Indian Govt. has to adopt the Chinese policy if it wants a growth rate which can throw it into the Superpower league. India is currently a developing country and before the development phase gets over we need to make as much cash as we can (as the saying goes Make hay while the sun shines and the sun is surely shining). I think maintaining INR at this rate is the only method how we can stay competitive and I hope Govt. soon comes to its senses.
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