UN-coding the Chinese Yuan Unpeg

Ok.So China has announced its intention to remove the Yuan Peg on the US Dollar. The world has jumped with joy on a positive sentiment. But is the bumpy ride really over? Is it really going to be as smooth as we think it is?

Let us begin by what pegging is actually all about. You see, currency rates all over the world are determined by demand and supply forces. Assume that a particular country is export oriented, and that its exports, and therefore the economy are doing good. This means the companies there are doing well. This means foreign investors are interested in buying stocks of those companies. They will want to set up partnerships, open up branches, sales offices etc. All this means that they will require the currency of that country in order to buy stocks and goods, or do all these activities.This means, eventually, that because the economy is doing well, the demand for currency of a country will rise.

This is where the game begins. Because the demand for the currency increases, the value of the currency appreciates.This means that the same goods now become more expensive. This means that its imports increase and exports decrease, because other countries goods become comparitively cheaper. Simply put, the economy of the country no longer does well. This means that the demand for the same currency now reduces. This means that the currency now depreciates.We are back to the same situation!

Do you see the self correcting cycle here? This, as we all know, is text book economics. In the long run, whichever country or economy manages to hold on to the positive cycle does well. But the point is that it is this cycle, or fluctuations, as we call, that is responsible for what we know as ECONOMIC EQUILIBRIUM.

Now what pegging does, is that it isolates the currency from this self correcting cycle. China, as we know is an export oriented country, and the world over uses products manufactured in China. As we now, its all "Made in China". Pegging means that your currency is RELATED or STUCK with another currency (base currency), and the movement of your currency is determined, not by the international trade cycle described above, but by the movement of the base currency. China had so far pegged its currency to the US Dollar. So, the strength and movement of the Chinese Yuan was determind directly by that of the US Dollar. Essentially,the Chinese currency is devaluated, or depreciated in value. Thus, its products always are much less expensive than most others, and this has been a major reason why China has dominated the world product export markets in the last 3 decades.

With pegging removed, the Chinese Yuan becomes dependent on the international trade cycle for value determination. This means that it no longer would enjoy the advantage of a constant perrenial devalued currency. It therefore falls int the 2nd part of the above cycle. A move to UN peg the currency means the currency will appreciate in value, thus resulting in lower exports etc etc. More importantly, this opens up the world export markets by reducing China's domination. The USA will be most happy with this development because this gives them an opportunity to reduce their trade deficit- the difference between exports and imports. In the case of the USA, this is highly negative, given its exeptionally strong consumption pattern.

This explains why the market sentiment was strongly positive on the first day itself. However, the immediate slow down on the 2nd day and subsequent expectations seem to imply that such a huge change cant happen so soon and smoothly. World economies still need to control costs and increase efficiences to match the bandwidth and expertise built up by China in 3 decades. If the Chinese currency starts appreciating too much, it could again buy US dollars, thus increasing the value of US dollar, and subsequently devaluating its own currency Yuan.

This is quite early to predict how this event unfolds in the coming time. However, world economies must be a little careful in being too cautious or aware of this, because improvement is needed all across. My first prediction is that if the un-pegging indeed takes place, it is going to be a good development globally.

The T-20 fiasco- The IPL angle

A lot has been written about India's recent cricket failures- the loss to Australia, the 2 match loss against Zimbabwe, and most of all, the T-20 World Cup debacle. Too much analysis has been made and all the points are the same.

Ok, first of all, I would really like to congratulate the England team for winning the t-20 IN STYLE. The way Aus was playing, I really appreciate England nothing less than winning the finals. This nation has given us the game of cricket, and represents great professionalism and grace in handling things. For them to have not won any major tourney in the recent past was an upsetting thing for someone like me, who is a fan of the country itself. Collingwood's men showed great character in dominating the tourney and winning the finals against the strong Aussies really sweetly.

Back to the Indian drama. Lazyness, partying, lack of seriousness towards fitness, arrogance, over confidence etc are the commonly cited reasons. But like Aamir Khan mentioned in a beautiful scene in TZP, these are symptoms, not causes.

As I believe, the real causes for the debacle are tow fold-one, the recent success in both the one day and test format, and, two, the IPL. The recent success, has caused some pretty natural arrogance and overconfidence, collectively termed complacency.

The IPL, the phenomenon that we know, has been a mixed blessing I would say. As much a fan as I am of it (I track it only when Mumbai play), I do think its not a mere coincidence that the last major multi team tourney India won- the T-20 2007 WC, was a year before the IPL. India has had tremendous success in tests and 2 nations series since then, but multi team tourney remains elusive.

Here is why I believe the IPL has been variously responsible for the failure. Ok, the IPL does reveal new players. But then, how many of those have actually made their mark? Barring Yusuf Pathan and Ravindu Jadeja, none of the others have been seen in any form of international cricket ever since. Whatever happened to the "talented" Abhishek Nayar or Dhaval Kulkarni?

Fine, the IPL, just a week before the T-20 WC, gives good match practice and is the perfect rehearsel, when competing with, and playing alongside, world players. Well, not quite. Firstly, most of these so called international players are retired and play only to earn more money in retirement. Gilchrist, hayden, fleming, pollock, warne, etc are all out of international cricket, but have played in IPL. Playing against them is no match practice for the younger world players taking to T-20. Its no good either in playing against each other, because that is not helping.

Look at it this way. Before every major graduation exam, we have a preliminary exam. This exam gives an indication about how well prepared we are, but can never replace the actual studies. Therefore, there is a gap of about a month between the preliminary exam and the final one. Studies happen in this month.

The IPL is similar to this preliminary exam, although with a rider. It is an OPEN BOOK preliminary exam. So, although the exam does give us a feel of how the main test is gonna be, because it is open book, we are never really tested. The IPL does give us an idea of how the players are going to play, but not completely. Also, there is not time between the IPL and the WC, which means the actual studies- the NET PRACTICE, which is oh so essential, does not happen! This is where I think the IPL causes a problem in its concept and being taken for granted as the perfect pitch for the world cup. It is so far away from it.

Thirdly, and more importantly, the IPL gives too much exposure to world players of Indian cricket strategy. Consider this. Barring Jacques Kallis and Boucher, we do not have too many SA Players playing in the IPL. So, the Indian players playing along side or against them, learn about the strengths and weaknesses of only 2 SA players. The 2 SA players, on the other hand, come to know about almost every India player participating in the WC. Same holds true for the couple of Englis players Boparra and Peterson., or for Mahelam Sangakarra and Mendis- the 3 SL players. My point here is- the Indian cricketers are getting too less in return for the tremendous amount they are giving away- game strategy, strengths and weaknesses. The world now knows a lot about the India cricketing strategy, while we know very little. This becomes very important in global competitions.

Concluding, I believe the Indian cricket is certainly undergoing a change with the coming of IPL, but the effects of this change could be massive and huge if not checked.