Institute of Chartered Financial Analysts of India (ICFAI) University 2006 Certification Finance International and Trade - II - Question Paper

It is a widely known fact that the 2% revaluation of the yuan (from 8.28 to 8.11 vis-i-vis the US Dollar) is a policy measure largely orchestrated by the US. The Americans claimed that the mounting trade surplus enjoyed by the Chinese with them outcomes in a worsening of trade that added to the ready perilous position of its current account deficits. Japan too has seen a steady erosion of its competitive advantage since the yen has been steadily appreciating while the Renminbi, being pegged to the dollar till date, has been depreciating along with it. However, the statistics reveal that the yuan is valued by as much as 40%. Hence, the ques. is to what extent will a mere 2% revaluation facilitate a solution to the burgeoning current account deficit of America. provided that huge stocks of the greenback are parked with several other Asian and Middle Eastern countries apart from China, the contribution of China towards aggravating the US situation seems, to say the least, exaggerated. It is estimated that the current 2% revaluation of the yuan can at the best decrease the current account deficit of the US by less than one %. The Americans have based their premise on the argument that huge quantities of Chinese exports are eroding its competitiveness. If this is indeed the case, nothing less than 30-40% revaluation would have any notable impact on the competitiveness of the US, which the Chinese are unlikely to undertake at this juncture.

Yet a different ques. that merits attention here is the impact of yuan revaluation on the domestic Chinese economy. More or less similar situations can be predicted for other Asian countries as well, though the degree may vary. It must also be noted that the US is 1 of the largest customers of the products of many Asian countries. Dollar depreciation can adversely affect the exports of the products of the Asian countries to the US since dollar denominated imports will be expensive. This precisely is the cause why Asian nations are diversifying the currency baskets in a secret manner lest the dollar should depreciate sharply hurting Asian economy exports. However, as any learner of economics would say, the export position of Asian' economies can turn grave only if the demand for Asian goods are highly elastic. provided that goods like fibers and textiles are highly inelastic in demand due to the lack of other option import destinations, the depreciation of the dollar might not have the feared impact on Asian economies.

It can be observed that from the month of May to August, there has been an improvement in both forex reserves as well as foreign exchange assets other than for a marginal decline in the month of June. After breaking past the 143 barrier, there has not been a perceptible improvement as well. Interestingly, it was after July that the yuan revaluation started. The cause for the almost constant position of the reserves may at lowest be partly due to the concern about dollar reserves due to an expected slide in its value. It is noteworthy that during this period the rupee also started appreciating against the dollar.

Earning:   Approval pending.