Currency War-US, Europe are unjust in their demand for Yuan appreciation

15/10/2010

The rate of exchange between US$ and Chinese Yuan is around $1= Yuan 6.7. US(and other developed countries in Europe etc) thinks that Yuan is undervalued to the extent of about 25% i.e. their view is that the rate should be around $1= Yuan 5 or 5.5. The arguments of US is that since the Yuan is undervalued, products imported from China into US are cheap compared to local products, and this is detrimental to the US industry, and leads to job cuts estimated at around 0.5 million. Further, US products exported to China are expensive in China and hence US exports suffer. China’s foreign exchange reserves are very large (around $2650 billion) and this should normally make China’s local currency appreciate against other currencies but it is not happening. . According to US, China manipulates the exchange rate

US argument is not fully justified because,

i).it does not take into account, the fact the China exports to around 200 countries and the number of countries affected by current rate of exchange are only a few. Most of the developing countries benefit when prices of imported products are low.

ii) Many countries do not have the concerned industry and the question of the local industry suffering or workers losing jobs do not arise at all.

iii) Where local industry exists, Chinese equipments and products fill the gap between supply and demand, at comparatively low prices thus meeting requirements of importing country and helping industrialization of that country.

iv) Even in US, the general public will only be happy to get their requirements from China at a lower rate. The large number of consumers is not bothered about the job loss for a few hundred thousand people or manufacturers suffering loss.

v)To protect the local industry and save the jobs, US could think of means like imposing/increasing import duties on Chinese products, assisting the exporters with incentives like low interest rate for exporters, exemption from tax for profits from exports etc.

vi) US could think of means of making its industry competitive in relations to Chinese industry, by asking workers to increase their productivity, upgrading technology, minimizing overhead expenses etc..

vi) US(also European) industry being affected by Chinese exports or its inability to export to China is a bilateral issue and should not be made a multilateral issue as the US gain from appreciation of Yuan will harm many, particularly developing countries importing from China.

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Debt to GDP ratio and Economic Growth

02/10/2010

There have been some studies and conclusions therefrom about Debt to GDP ratio of a country and the econonomic growth rate. Some of the conclusions are:

1.once the debt to gdp ratio exceeds 77%, the growth rate will fall

2.for every 10 percentage points fall in debt to gdp ratio, growth rate will go up by 1.4%

These conclusions do not hold good in all situations and for all countries. Further fall or growth in growth rate depends also on the type or purpose for which the debt is incurred.
Generally,

i.if the debt is maily for purposes of undertaking short gestation project like dams, irrigation canals, linking rivers with one another and with lakes etc. the growth rate will go up even if the debt to gdp ratio exceeds 100% or even 150%.

ii.if the debt is incurred for productive purposes like generation and distribution of electricity, import of technology, capital goods, raw materials etc. there will be no fall in growth rate even if the debt to gdp ratio is very high

iii. if the debt is incurred for unproductive purposes like increase in wages without increase in productivity, welfare measures, sports, entertainment etc. growth rate may fall with increase in debt, though in some cases, increase in spending power of the people may lead to increase in demand and consequently production.

iv. irrespecive of the debt-gdp ratio, economy would witness growth, if all able-bodied persons work and they put in their maximum possible ability, time, energy, attention etc to the work

v. the amount required for servicing the debt depends not only on the quantum of debt but also on interest rate. If the interest rate is low or nil, and the repayment period is long, serving debt may not be a big problem.