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What it means if China lets its currency appreciate

It is not always that Stephen Roach, the chairman of Morgan Stanley Asia wants to batter people who don’t agree with him. But Paul Krugman’s remark that China should be forced by the U.S. to appreciate the renminbi is something that has not gone well with Roach. Roach argues that China has a savings surplus but doesn’t feel that all that can be attributed to the depressed renminbi, while Krugman argues that the currency gives China an unfair advantage.

The fact is that the pressure on China to revalue its currency is rising. And experts feel that it is very likely that China will revalue its currency soon. According to the Peterson Institution of International economics, the renminbi is undervalued by 20 to 40%. This itself warrants an appreciation of the currency.

What if China does revalue its currency? What will be the effect on India?

Currency traders feel that even if we assume that the Chinese currency is undervalued by 30%, China is surely not going to revalue it to the same extent. The consensus is that Chinese currency will be revalued by not more than 2% for the next year. The US will not be happy with that, least of all Paul Krugman.

But should India be happy about it? That depends on how you look at it. That the Indian rupee will benefit because the Chinese currency will appreciate is probably not true. “I think there will be a contagion effect. If the Chinese currency appreciates then the whole of Asia will get re-rated. And India will be a part of it. We will see our currency appreciate along with China,” says Manis Thanawala of Greenback Forex Services. If a large economy’s currency appreciates then other large economies in that area also see an appreciation. In any case, the Indian currency is on a long-term uptrend. So the short-term appreciation of the renminbi is not something that most currency experts in India are accounting for. If anything, it can only make the rupee rise.

One of the biggest assumptions behind that statement is that the RBI will maintain its ‘no intervention’ policy in the forex markets. So, generally, it is assumed that a 2% appreciation in the Chinese currency will lead to a 1% appreciation in the Indian rupee. The appreciation of the currency by around 30% can safely be declared as impossible.



One thought on “What it means if China lets its currency appreciate

  1. It is not always that Stephen Roach, the chairman of Morgan Stanley Asia wants to batter people who don’t agree with him.


    Posted by Best Currency Rate | June 7, 2010, 10:33 am

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