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Don't Give It Currency

Authors: Jagdish N. Bhagwati, and Arvind Panagariya, Professor, Indian Economics, Columbia University
May 3, 2010
The Times of India


India has joined the US in "China bashing", calling upon the latter to revalue its currency. According to the Financial Times (April 22, 2010), India's Reserve Bank governor spoke ahead of a meeting of finance ministers and heads of central banks of the G20 in Washington, joining with Brazil, to make a forceful case for a stronger renminbi (also called yuan). This is a mistake.

For some time now, the US Congress and some Washington think tanks have aggressively sought to turn the bilateral exchange rate issue between the US and China into a multilateral issue. They have done this by asserting that the undervaluation of the Chinese currency hurts not just the US but Asia and others as well.

The underlying argument is based on a syllogism. The first argument is that an undervalued renminbi is the root cause of the Chinese current account surpluses and the US current account deficits. The second argument is that the export expansion so achieved by China robs countries such as Brazil and India of their export markets. The RBI governor was explicit in accepting this second argument when he said: "If China revalues the yuan, it will have a positive impact on our external sector. If some countries manage their exchange rates and keep them artificially low, the burden of adjustment falls on some countries that do not manage their exchange rate so actively."

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