Renminbi Falls

The latest decision of the  Chinese authorities to devalue their currency, Renminbi, is no surprise. The reason is simple enough; China is yet to tide over the recession that had begun with the global meltdown. Her huge programme of internal construction, a typically Keynesian solution, has evidently failed to deliver the goods, most probably because it has been unable to inject enough purchasing power into the internal economy and thus enlarge the internal market for its industrial goods. According to a report of the New York Times News Service, "Auto-makers, typically a bellwether of demand, have announced declines in sales last month; Ford China, for example, said last Friday that its sales had fallen 6 percent last month compared with July last year". Hence China needs to expand its export sector further by making her goods more competitive in the US and Europe. This is why she devalues her currency.

No doubt, the devaluation of the Chinese currency has created ripples across global financial markets. Major Asian currencies have dropped.

The ruling global ideology is to remain competitive in the global market. What is forgotten is that trying to boost exports at any cost is finally a zero-sum game. Rise in one country's exports means fall in another country's. Devaluing the currency may be one option, another option is to pare costs, particularly labour costs. In China, economic inequality has rapidly grown during the post-Mao period and hence the crisis of under-consumption is very much there. The Chinese economic authorities, instead of expanding the entitlements of workers of their country, has chosen the easier option, the option of more intensified globalization. On the other hand, as Chinese goods flood the US and European markets, there will be more loss of jobs there, giving rise to more social unrest there, because the jobless are unlikely to accept their fate lying down. Hence the Chinese decision is unlikely to improve the lot of workers of China as well as of the western world, although it may improve the conditions of the Chinese corporate mandarins.

Indians too are witnessing a parallel situation. The price of rupee has now become the lowest in terms of dollar in two years, making essential imports more expensive. The condition of the share market has worsened. The two phenomena reflect the balance of payments position well enough, although the decline in oil prices has made the balance of trade account somewhat more comfortable. The fall in the price of rupee to a two-year low however, is not the result of any official decision, but a fall-out of the devaluation of the Renminbi, and hence it cannot be said in advance that Indian goods will be more competitive in Europe and the US. The fall in rupee is in line with the fall in currencies of Australia, Malaysia, Indonesia and other economies. Both India and China, notwithstanding the impact of the global meltdown, are bent on pursuing the 'forward-looking strategy' instead of expanding the internal market by reducing inequality and enhancing the capabilities of the vast majority of the people. So, the Renminbi and the rupee are competing for acceptance in the international market by degrading themselves. It is clear that the policy cannot be sustained for long.

The Chinese currency shed 1.9% on Tuesday (August 11) and 1.4% on Wednesday (August 12) against the US dollar. This is the biggest drop in the currency in two decades. China is now looking to include the Yuan or Renminbi as a reserve currency as defined by the International Monetary Fund, the Washington-based global multilateral lender. Currently, IMF recognizes US dollar, Japanese yen, British pound and the Euro as reserve currencies. The criterion includes exports that influence the world economy. While China qualifies being one of the biggest exporters, lack of a free floating currency whose value is determined by market demand and supply has stalled inclusion of the Chinese currency in this group. IMF has endorsed the move to let the currency depreciate.
12-08-2015

Frontier
Vol. 48, No. 7, Aug 23 - 29, 2015