The pressure on China to appreciate the yuan is gaining momentum, with the International Monetary Fund adding its voice to the crowd. There are plenty of reasons for the pressure. With experts warning that growth in the developed markets is likely to remain low for quite some time, the export-oriented economies of Asia are scrambling to ensure markets for their goods. China, however, enjoys an unfair advantage over the other exporters, simply because it pegs its currency closely to the dollar. The situation has been made worse by the inflow of dollars into Asian capital markets and by the dollar carry trade. Since funding costs in the US are very low, speculators are borrowing in dollars and investing in non-dollar assets. These factors have led to a sharp rise in the exchange rates of Asian currencies.

Graphics: Yogesh Kumar / Mint

The US Dollar Index, which measures the dollar against a basket of six currencies of the developed world, reached a high of 89.11 on 5 March before starting a long slide—on Friday, it closed at 75.33. That’s a fall of 15.5%. Since 5 March, while the dollar has been steady against the Chinese currency, it has depreciated by 15% against the euro, by 22% against the Indonesian rupiah and by 26% against the Korean won. The chart shows how the currencies have performed against the dollar since 5 March. Note the flat yuan, while the won and the rupiah have appreciated dramatically. That naturally puts the exports of these countries at a disadvantage against Chinese exports.

Incidentally, the Indian rupee has not really seen much appreciation, despite attracting large dollar inflows, probably because unlike most Asian economies, India runs a current account deficit. Also, while several Asian central banks have been buying dollars in order to support it, the latest Reserve Bank of India bulletin shows that the central bank’s dollar purchases in August and September have been very modest.

For the Asian exporters, the worries are twofold. One, they are obliged to support their currencies and are adding to their reserves by buying dollars, which is depreciating in value. They have been trying to diversify their reserves away from the dollar, which makes the dollar even weaker. And two, they are losing exports to China. Incidentally, the relative weakness of the rupee should be good for the country’s export sector.

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