Rates of Exchange and Exports

20/10/2013

It is generally believed that when a currency is upvalued(revalued) it would affect exports as the export items would become costlier. This is not really true. When the currency is revalued, imports become cheaper and cost of living comes down. The local currency gets strengthened. In 2005, Chinese Yuan RENMINBI(CNY) was USD 1 = CNY 8.09. Since then the CNY has appreciated and now USD 1 = CNY 6.09. With the appreciation of CNY exports did not decrease. On the contrary, exports from China when up from USD 939 billion in 2006 to USD 2,057 billion in 2012. Indian exports also went up from USD 122 billion in 2006 to USD 298 billion in 2012. The Indian Rupee also depreciated from USD 1 = Rs. 45 to USD 1 = Rs. 60. Here the depreciation is not the main reason for the increase in exports. Even without the deprecation the exports went up to USD 198 billion in 2008. So while fixing the rate of exchange the purchasing power of the respective currencies should be taken into account. The main contributing factor for increase in exports is surplus production, lower cost of production and the quality of products. A currency should not be allowed to depreciate thinking that this would contribute to increase in exports. The rate of exchange between Indian Rupee and US Dollar should be USD 1 = Rs. 20 or Rs. 25.  

 

Author: Singharan Govindan


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.