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Facing growing pressure from around the world, The Peoples Bank of China announced on Saturday that
it is prepared to allow the country's currency to float more freely against the dollar and other foreign
currencies. The bank said that this step is in view of the recent economic situation and financial market
developments at home and abroad, and the balance of payments (BOP) situation in China
This step by the Chinese government would end the two-year Yuan Peg to Dollar (6.83) and will take the
pressure of Beijing at the G20 meet at Toronto next week. It seems that the Chinese will not strongly
revalue its currency because the very next day in a follow up statement it ruled out a one-off revaluation
and said there were no grounds for a big appreciation of Yuan. However, the revaluation will have a dual
impact on Chinese economy
On one hand it would make the Chinese exports expensive for the world market and will benefit
exports from other competing countries like India, Brazil and other South East Asian economies
On the other it would make imports cheaper for China and will give the government a strong tool to
manage its inflation, increase the purchasing power of the people and resulting in more broad
based growth and in turn leading to the establishment of service sector in the country
All and all this move by China is good news for the global economy and other developing countries that
are unable to compete with China in terms of exports because of its week currency.
Indian Perspective
This will ease Indias trade deficit with China and will help Indian exports of textiles, leather products,
marine products, engineering products, auto ancillaries more favorable in comparison to the Chinese
exports.
The trade between India and China soars closer to the US$60 billion target, Indias trade deficit with China
is increasing. In 2009, India suffered a trade deficit of US$15.8 billion against China, while in 2008 the
trade deficit was 11.17 billion., thus a stronger Yuan will help in eliminating this deficit and also increase
the cost of Chinese imports of electrical machinery and other goods into India and benefit Indian
manufactures.
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Macroeconomics Update
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Macroeconomics Update
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