BEGGAR THY NEIGHBOUR POLICY: SHORT TERM DOMINO EFFECT

China guided Yuan at a higher rate after its own stock market was roiled on Thursday. Though the stock market crash was partly attributed to circuit breakers placed on 4^th of Jan this year, Yuan’s devaluation with respect to dollar has made obvious things apparent to the global trading community. There can be two reasons as to why Yuan has been deprecating. One theory explains the need to devaluate and integrate it with global economy after Yuan has been included in the IMF's SDR basket. The other theory is that China is following ‘Beggar Thy Neighbor’ Policy which advocates devaluation as recourse for resuscitating flagging domestic economy.

Last year, RBI was accused for not helping Indian exports by devaluing rupee relatively to other currencies. RBI stood its ground against forced deprecation of Indian rupee and favoured market determined exchange rate. This recent Yuan event would have taught a lesson to our economists and bureaucrats alike. Depreciating currency is a short term fix to stimulate economic growth. Falling currency makes exports competitive or cheap and imports expensive for any economy. So even if China tries to boost its exports through devaluation, expensive imports would not be able to stimulate its slowing economy which is in dire need of fast track reforms. We hope China is not following the second theory and has thus fixed a higher peg against the dollar today. Even if it does, it will not be able to pursue it for long term. Being the second largest economy of the world, China is not expected to spread financial distress globally, rest only time will tell.