Indian Protests China's Yuan

Sources:
Reuters: Indian CBank Report: Weak Chinese Yuan Disadvantages India
The Economic Times: India Being Hurt by Undervalued Renminbi: RBI
NASDAQ: India-China Trade Deficit Could Reduce on Renminbi Appreciation – RBI Study

India is the newest country to join in the criticism of the value of China’s yuan, China’s currency. Almost all criticism calling for China’s valuation of the yuan has previously come from the United States and Europe, so India’s criticism is an additional pressure on China to properly value its currency. India, the United States, and Europe all have called for China to let the yuan rise in value so their exports are more competitive in the Chinese market, a massive market for exports because China has so many consumers. India’s criticism is likely to be more important than that of the rich nations because China and India are both developing nations, so China cannot claim the developed world is trying to protect its own interests at China’s expense.

In the paper, “The Implications of Renminbi Revaluation on India’s Trade,” S. Arunachalaramanan and Ramesh Golait of the Reserve Bank of India, India’s central bank, have said that an artificially undervalued currency gives China a distinct advantage in the export market. In India, the share of imports from China rose to 10.7% of Indian imports during 2009-10 from 7.3% five years ago. The bulk of imports from China were high value electronic and machinery goods, which form more than 40% of imports. High demand for artificially cheap Chinese goods created an Indian trade deficit with China of $19.2 billion U.S. dollars from 2009-10. The paper estimates that a 1% depreciation of the rupee, India’s currency, against the yuan is likely to reduce India’s imports from China by 0.43 percent.

The Indian rupee has a de facto semi-floating exchange rate with the U.S. dollar. The Indian rupee’s exchange rate is less fluid than that of a pure floating exchange rate, but can still gradually change in value. So when China has a firmly undervalued exchange rate with the U.S. dollar, the exchange regime makes China’s undervalued currency damaging to India too. China has intervened in the foreign exchange markets by buying an average of $1 billion per day for the last five years to keep the American dollar expensive while selling the yuan to maintain its low value. Selling the yuan keeps it devalued because its increases the global supply of the currency. China has now amassed $2.5 trillion in reserves.

Additionally, India’s unit cost of labor has risen, while China’s unit costs have continued to drop, because Indian compensation has outpaced increases in labor productivity. The unit cost of labor is the cost of labor needed to produce one good. These increased labor costs make Indian products more expense to consumers and less attractive to importers, which is another blow to India’s trade competitiveness.