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Advantages & Disadvantages of Yuan Becoming More Valuable

An upward revaluation of the Renminbi would carry its own pros and cons. What is appreciable over here is "How the Chinese government has walked a thin tight rope by managing not to tick off its domestic industry nor its trade partner."

For China

The maximum trade of China is with US (contribute almost 21% to Chinese exports). Changing pegging from one to 11 currencies will have stiff impact on China.

Advantages

Cheaper Imports

China imports technologies, petroleum, metals, machinery and skills from other countries. China is the biggest consumer of many commodities such as aluminum, steel, coal and copper and second largest consumer of oil. With the increasing prices of these commodities, appreciating Yuan will put less pressure.

Overseas Investment and Expansion

With huge forex reserve (US $514 bn in Sept'04), a stronger Yuan and government loosening the control on capital outflow, it will be economically rewarding to invest abroad. On the other hand, Chinese firms may desist from investing abroad if they fear further depreciation may not provide required rate of return. In short run, they prefer to wait before dollar depreciate before making investment.

Control of Inflation

Inflation can act as damper to overheating prices and excess liquidity. Increased income and more confident mindset of Chinese has improved the marginal propensity of consumer, fostering to excess liquidity and made Chinese Central bank's sterilization strategy of issuing bonds less effective.

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* Contributed by -
Jyoti Singh,
PGDBM 2006,
IMT, Ghaziabad.