Currency's Contention: Lose Value to Win

Ajeet Pratap Singh

MBA 1^ST Year

IMB2009029@iiita.ac.in

China. China has always been a newsmaker. And why not, a county of its size can never be overlooked. When we talk about size, it has more dimensions than one. As one of the fastest growing economies in the world, with trade surplus over almost any other economy, having big pool of abundant labour, rich in natural resources, technologically well off China is an undisputed super power of modern times. Science, arts, sports, economy and industrial activity - name the domain and you would find China to be a front-runner all around. Latest in the news is a Chinese "dissident" who is being honoured with Nobel Prize.

Now, let's have a look at the flip side of it, the not-so-charming one.

A pro-democracy Chinese national is chosen for much respected Nobel Prize for Peace and the whole state is in fury. Mr Liu Xiaobo, a former literature professor who has been serving 11 years sentence in jail since December 2009, was told about his widespread acclaim by his wife, and she is under house arrest since then. For Nobel committee, Mr Liu is one more rebel of the rulers' like Aung San Suu Kyi (Myanmar), Andrei Sakharov (Russia), Lech Walesha (Poland), Carl von Ossietzky (Germany). At the same time, he is a blacked out news in China, as if who cares the premiers of nations around the world congratulating him.

On 10 August, 2010, a friendly Basketball match between Chinese and Brazilian national teams degenerated into a brawl. Visitor Brazilians were attacked by Chinese team which has been in fights before also. Asian Games preparations are hit by the incident while Chinese federation is apologetic to everyone concerned.

An even more prominent and enduring debate is attracting global attention towards China these days. And, in present times when even the wars are being fought with economic arsenal, two super powers of the world, USA and China, are at daggers drawn over their currency exchange rates. Like Chinese national basketball team has earned name for disgracing the sportsmanship, Chinese currency - Yuan is known for being devalued at will (read whim) now and then.

For keeping the later discussion as interesting as its previous half, a moment is worth to understand "Devaluation of Currency". For uninitiated, devaluation is simply fixing price of something less than it deserves. Now, this can be a very interesting, though confusing, paradox when somebody values everything by money and then decreases the value of money itself. While everybody wants his smallest penny to have a value so big that it can buy everything and even return a change, you must be wondering who would be so insane to underrate his own money. People's Bank of China does so and is so good at it that it does it the way it wants. As a result, Yuan is either devalued or is restricted to a low in the name of keeping its value "stable".

Consider the benefits of devaluation. A more valued Dollar can buy more of cheaper Yuan. Similarly, it can buy more Chinese products. This encourages Chinese exports. So far, so good! Consider it other way round (not reverse). A cheaper Yuan can by less of a costly Dollar, so it can buy less from USA also. This means Chinese people will be discouraged to import, especially from USA. This is not-so-bad situation for China because ultimately its China, whose Trade Surplus is remarkably high not only with countries like India but also with biggies like USA.

Here is a catch, another paradox. Now, USA also wants to devalue its Dollar by printing and circulating more of it. Why? Because it is facing huge trade deficit with China and wants to curb it. At the same time, it also wants to circulate more liquidity in the market (lesser value per unit would call for more units of cash, and more cash means more liquidity). Liquidity might help in recovering US economy from cash crunch it had during recent sub-prime crisis.

US government finds its own way out from a recession hit economy. Chinese economy is swelling under this same policy of devaluation of currency. They may both do whatever they like to do with their currencies. Still, where they cross each other's ways is when they blame each other for creating economic instability and souring ties between the two super powers. Understandably, sovereignty of the two is not being questioned here, but the selfishness is.

Both China and USA are part of WTO. If as a countermeasure to the low priced, surplus import from China, USA considering additional tariffs on Chinese Imports, China calls it against WTO. But then, the issue is not limited to the bilateral trade between China and USA. More so, because China has a trade surplus with almost every country it trades with. Now, if every country starts devaluation of its currency only to build up a trade surplus like China, the future would be unimaginable. New Zealand is doing this with Australia. On 15 September, Japan did it with its Yen when Yen appreciated sharply against Dollar (Japan sold 2 Trillion Yen to take Yen's value down against Dollar). A week back, same Japan criticised South Korea for doing the same with Won.

This is a built-up of recent "Recession" that has turned people into once-bitten-twice-shy, creating a big plot for competitive devaluation of currencies all over the world. While "insane" devaluation is getting frequent, the farsighted are trying to persuade those who are doing this. In the meanwhile, China - USA, Japan- South Korea, and New Zealand - Australia may enjoy mud-slinging.