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Reduced Foreign Debt Obligation

The dollar denominated debt obligation would be reduced (in Yuan terms) once Yuan will be revalued (because of depreciation of Dollar vis-à-vis Yuan). As per estimate, the principal of foreign denominated bond will be reduced up to 15%.

Focus on Domestic Economy

Revaluation of Yuan will force Chinese economy to become more productive, in order to counter the disadvantage occurring because of revaluation of currency. Chinese economy is excessive export-oriented which is dangerous (Japan has faced chronic deflation and three recessions in last decade because of its export focus and had left internal demand under-developed). Initially, this step of Yuan revaluation may hurt Chinese economy as prices may rise and take hit on profit margin. In long term, if efficiency is achieved and domestic demand is adjusted, enterprise would be able to generate more wealth.

Disadvantages

Growth can be Stagnated

Purchasing power of US customers will be affected because of Yuan appreciation; hence China will lose 'cost advantage' leading to fall in exports. This will show decreases in output and increased unemployment, which is already a big problem (even though there is boom in export after lifting the quotas).

Impact on FDI

FDI flow may decease drastically as the new investment will become unviable and existing one will no longer be economically beneficial as they used to be. Moreover, there will be increased forex risk associated with it. This could hamper economic growth of China and have considerable impact (as FDI is very high in China because of less stringent norms).

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