Yuan's impact on the global economy

Tue, 22 Jun Pre-Open

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After a lot of dilly dallying, China has finally decided to relax its peg to the US dollar. This development was received with enthusiasm from investors across the world as stockmarkets soared. The US is still struggling to recover and Europe is mired in a debt crisis. And so, China had been under increasing pressure from the developed world to do away with the artificial peg to the dollar.

Chinese authorities had earlier been reluctant to bid to the wishes of the West. This is because the Chinese economy was not able to replicate the 11% plus growth that it had been logging in before the crisis erupted. Meanwhile exports slowed down due to lack of demand from the rich world. Consequently, Chinese growth also slowed down. Little wonder then China was not keen to let its currency appreciate against the dollar. After all, exports would receive further beating.

But China recovered at a strong pace from the slowdown thanks to a rise in consumption, increase in bank lending and investments in the property market. The latter especially has raised concerns about a bubble once again forming in the dragon nation. In that sense, an appreciation in the yuan at this time is probably a good move by the Chinese authorities. This is because the economy has performed better than what it did at the height of the crisis. But more importantly, it will rein in inflation, prevent the formation of bubbles and reduce the dependence on exports.

For the global economy there could be some sort of rebalancing. Before the crisis unfolded, America and the rich world were consuming more than they produced. They ran into debt troubles and deficits as a result. China meanwhile has amassed surpluses and needs to consume more for the greater health of the global economy. Since, imports for China will be cheaper, the Chinese would be persuaded to consume more. This will however be a gradual process and it remains to be seen how the impact of the yuan revaluation pans out in the longer time. For the time being, however, willingness of the authorities to take the first step must surely be a welcome relief to the US and Europe.

It is now upto the developed world to spur their respective economies and reduce the high levels of debt that are choking recovery. China’s recent actions with respect to the yuan means that the US and Europe can no longer blame the dragon nation for the ills afflicting them and the global economy.