Showing posts from January, 2017

Undervalued currency of China and learnings for India

China maintains an undervalued currency which is one of the key reasons for trade surplus of China with most trading partners. It has also led to huge forex build up over the years. While China's undervalued currency has faced criticism from trading partners, the public policy choice of this tool for development of China is not well appreciated. The use of currency undervaluation as a tool to gain export advantage has decreased over time for China due to multiple factors and I doubt it the current level of Chinese currency is as undervalued as it used to be. Yet, as a policy lesson it is illuminating to analyse the effects. China has used the currency as a policy tool to empower itself; it is just incidental that this policy has done damage to trading partners. The undervalued currency of China acts as a direct subsidy for exports. A 20% undervaluation of currency is equivalent to 20% direct subsidy support in terms of export price. Given that China has usually maintained an und