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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Why RBI should not lend US$1 billion to SBI?

25/07/2010

The State Bank of India has raised   US$ 1 billion through overseas bond issue at an interest rate of 4.5%. This money is for providing its foreign operations and also for supporting Indian companies with external commercial borrowings.

Reserve Bank of India has foreign exchange reserves of about US$ 270 billion. RBI has deposited the same in foreign countries with foreign central banks etc at much less than 1% interest rate. For any country foreign exchange required for meeting imports for 3-6 months is sufficient. This means that   the country needs foreign exchange of about US$ 75-150 billion. Thus RBI has excess foreign exchange. Instead of allowing SBI to raise funds through overseas bond issue at 4.5% interest rate, if RBI had lent this amount, the country could have saved foreign exchange of $45 million dollars per year.

RBI should consider lending money in foreign exchange to Indian commercial banks from its foreign exchange reserves instead of allowing commercial banks to raise funds overseas.