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Tensions between the United States and China always seem to be percolating. This time it's about money.
The U.S. trade deficit with China is more than $200 billion. Many in Washington consider the cause to be an inconsistent and fluctuating Chinese exchange rate. China's currency policies have become a source of tension between the two countries, even leading some to claim that China's exchange rate is the cause of the sluggish economy in the U.S. President Obama recently suggested that perhaps China should let the value of its currency float more freely on world markets to help correct global economic imbalances.
After President Hu Jintao's visit to Washington for the Nuclear Security Summit, he told Obama that China is reviewing its currency policy. According to official Chinese media reports, any modification "will not be advanced by outside pressure,", and will be based on China's "own economic and social development needs."
After the Chinese president's remarks, widespread speculation about China's current currency markets and RMB exchange rate have made hitting headlines in Washington and raised concern for other foreign markets like India. If China raises the value of the Renminbi (aka the Yuan), Chinese exports would be more expensive on world markets and would make foreign imports to China cheaper, leveling the playing field for those countries able to control their markets.
So far, the pressure on China to revalue its currency has only been from the U.S., but in order to gain dire support the U.S. has turned to its allies. The U.S. has approached the European Union and Japan for help, but neither country's deficit is as large as the U.S. and both are standing on the sidelines watching the Sino-U.S. engagements. The U.S. also approached India. U.S. Treasury Secretary Tim Geithner recently took a trip to India with the intention of persuading India to apply joint pressure on the RMB exchange rate.
Duvvuri Subbarao, the Governor of the Reserve Bank of India (India's central bank) stated that "If China revalues the Yuan, it will have a positive impact on our external sector. If some countries manage their exchange rate and keep them artificially low, the burden of adjustment falls on some countries that do not manage their exchange rate so actively." Hence, implying that India may support U.S. efforts to pressure China's currency policy.
Will India be used as a tool in an overarching U.S. strategy to tackle its deficit with China or will India stay loyal to developing countries and stand by China?
The statements of all parties involved will be addressed in an upcoming meeting for finance ministers and central bankers from G20 countries later this week.
India should be cautions and observe the markets carefully before it makes any decisions. Recently, the Bank of India increased key policy rates twice in two months, which is against economic predictions. Any drastic changes to the RMB exchange rate could have unpredicted effects on India's economic growth and could potentially halt its fast growing economy.
Babeeta Dhillon is a first-year graduate student in the Master of Public Diplomacy program. Her topics of research include nation branding, corporate diplomacy, and environmental diplomacy, while her regions of focus are India, the United Kingdom, Australia, and the Middle East. This op-ed is part of a partnership between Neon Tommy and the Association of Public Diplomacy Scholars.
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