Facing growing pressure from around the world, The People’s Bank of China announced on Saturday thatit is prepared to allow the country's currency to float more freely against the dollar and other foreigncurrencies. The bank said that “this step is in view of the recent economic situation and financial marketdevelopments 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 thepressure of Beijing at the G20 meet at Toronto next week. It seems that the Chinese will not stronglyrevalue its currency because the very next day in a follow up statement it ruled out a one-off revaluationand said there were no grounds for a big appreciation of Yuan. However, the revaluation will have a dualimpact on Chinese economy
On one hand it would make the Chinese exports expensive for the world market and will benefitexports 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 tomanage its inflation, increase the purchasing power of the people and resulting in more broadbased growth and in turn leading to the establishment of service sector in the countryAll and all this move by China is good news for the global economy and other developing countries thatare unable to compete with China in terms of exports because of its week currency.
This will ease India’s 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 Chineseexports.The trade between India and China soars closer to the US$60 billion target, India’s trade deficit with Chinais increasing. In 2009, India suffered a trade deficit of US$15.8 billion against China, while in 2008 thetrade deficit was 11.17 billion., thus a stronger Yuan will help in eliminating this deficit and also increasethe cost of Chinese imports of electrical machinery and other goods into India and benefit Indianmanufactures.