Sunday, March 7, 2010

CHINESE NEW WEAPON:CURRENCY

China has been the prime leader of 2009 in economic recovery competition. The stimulus package has helped china to have a GDP growth rte of 10% beyond the forecast of any economist across the world. China apart from stimulus package the undervalued Chinese currency has played the major role for the prolonged GDP growth of china in the past couple of decades. The stimulus package game was just for a small period of time where as undervalued yuan.
We have been reading and hearing that Chinese products have replaced the domestic products produced by US and Europe in their own shopping malls. Prime reason for this is low price of goods and services produced by Chinese manufacturers.

• Low price have been achieved by Chinese production houses due to undervalued yuan.
• Now many of you might be new to know that how undervalued currency helps a nation to increase its manufacturing and replace goods produced by other nations.
• An undervalued currency tends to make a country's goods cheaper, causing its trading partners to import more than they would otherwise.
• China has made the currency undervalued as fiscal sop for its economic growth.
• In other words china has capitalized at the cost of other nations by making its currency undervalued.
• It has increased its foreign exchange at the cost of other nations. Cheap products of china have resulted to increased unemployment of US and Europe.
• Since when products at home became costly they have no other way to cut short employees and workers to reduce their fixed cost and compete with Chinese goods.

Very recently we all heard that Chinese products have been banned by US and Europe followed with India. Since china is eating way the industrial belt of these economies through its undervalued currency.
China has been able to become number 1 in the world economy which hold US treasuries. According to data form the US Treasury Department, China held $894.8bn (£591bn) of US Treasury securities at the end of December. Roughly two-thirds of the country’s reserves are believed to be in dollars and dollar-denominated assets such as gold. Very recently china have asked its citizens to buy gold and also Chinese government bought huge quantum of gold which was sold by IMF .China have been able to build this huge reserves of US treasuries due to its export competitiveness. Its undervalued currency has acted as a subsidy or fiscal sop to the exporters of China and to its manufacturers.

But now we are getting clear signals from US and other economies that to increase the valuation of yuan. Very recently U.S. President Barack Obama told this year that he will "get much tougher" with China on trade issues, including the currency. The U.S. Treasury in April also faces its annual decision on whether to formally label China a "currency manipulator," a move it has never yet taken. The mounting pressures on china relating to its currency have led china to declare that it will go for some upward revision of its currency.
But if china goes for a massive turn around in its yuan valuation then dollar might get replaced. Now many of you must have been shaken from their seats to hear that Dollar will be replaced by Chinese currency. In fact china holds the position of replacing dollar to Chinese currency.
China is the largest holder of US Treasury securities in December. Moreover if we look at the economic condition of US we find that it will take more than decade to come out in to a positive fiscal position from the present fiscal deficit of the United States is around $1.75 trillion deficit. The figure represents 12.3% of estimated gross domestic product, double the previous post-war record of 6 percent in 1983
• The rising deficit will exert pressure on the US dollar making it more vulnerable for export oriented countries.

• Since dollar will make only free fall and no recovery is expected until the deficit of US stops climbing.

• Moreover falling dollar will make export to us more costly where as export by US to other economies will be cheap. Now by the time you read this article US goods might have started replacing Chinese goods from Chinese shopping malls.

• Don’t get confused.

• What china has been doing so long is now being adopted by US. Now china in order to stop these type of probable practices , it will have revalue its currency. Now its must deal for China.

• And if china plans for some major turn around they can sell of the reserves of US treasuries and convert them in to Chinese currency making its more difficult for US.

Now it’s a matter of time to see what china does with its currency and how much US will try to press china on currency. If china goes for a burst out dollar might get a new cousin brother taking birth from Asian economy.China might use its currency as  a weapon. One thing is very crystal clear that China has to go for currency revaluation in order to remain on the table of WTO and IMF followed with Group of 20 nations. Moreover the time when China will go for currency revaluation, US treasuries will be sold by China making the currency market more volatile and equity markets will have to face a earth quake.

US should try to control Chinese market penetration but should not go for such steps which will make US bad days prolonged and difficult.

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