Thursday September 20, 2018

India's Modi takes swipe at countries that 'undervalue' currencies

By Asantha Sirimanne

Mar 12, 2016 10:39 AM GMT+0530 | 0 Comment(s)

ECONOMYNEXT - India's Prime Minister Narendra Modi took a swipe a countries that follow 'beggar thy neighbour policies' and allegedly undervalues their currencies, an allegation often levelled by some US officials against China.

"We have never tried to gain trade at the expense of our partners," Modi told a conference in New Delhi organized with the International Monetary Fund Saturday.

"We do not follow beggar thy neighbour macro-economic policies.  We never under undervalue our currency. We help the Asia and world demand by running current account deficits.

"We are therefore good Asian and good global citizens and a source of demand for our partners."

As the People's Bank of China started to collect large volumes of forex reserves from the early 1990s especially after reforms by then central bank governor Zhu Rongji which ended money printing, some US Mercantilists started to accuse the country of undervaluing the currency.

The false accusation (China Yuan moves show futility of US Mercantilism: Steve Hanke) has persisted despite a very sharp appreciation of the Renminbi over the last decade with the currency rising from 8.0 Yuan to the US dollar in 2006 to 6.00 Yuan by 2014. Since then it had weakened to about 6.5 to the US unit.

China has allowed the Renminbi to fall over the past few month amid capital flight, prompting renewed accusations of starting a 'currency war' by devaluation or so-called 'beggar thy neighbour policies'.

However a steep decline in China's forex reserves show that the People's Bank of China is trying hard to stop the currency from falling rather than weakening it.

China runs, or used to run a surplus in the trade and current accounts, mostly because it is an exporter of capital, including 'below the line' flows by PBOC purchases of US Treasury bills and lately, through official foreign loans through its Exim Bank and China Development Bank.

In countries like Sri Lanka and some others Chinese funding has been used to build infrastructure driving growth up and also expanding capacity for future growth.

China has been exporting capital and running a current account surplus, Zhongxia Jin, Executive Director for China, International Monetary Fund explained.

"China is a driving force and not a dragging force for the world," he said.

China has pushed 'stimulus' after the US credit bubble burst in 2008 and has now fired an internal credit bubble, which is starting to burst.