China's action on yuan a lesson to world economies: CEA

The devaluation aims at reducing the spread between onshore and offshore rates

Chief Economic Advisor Arvind Subramanian said on Wednesday that world economies will have to take note of Chinese currency devaluation designed to avert slowdown in economy and exports.

"There is no doubt that China is responding to its own internal development of slowing down of growth and exports in order to give its economy a boost. Policymakers around the world, including in India, have to take notice of this action," Subramanian said at a press briefing here on Wednesday.

The People's Bank of China had on Tuesday slashed the yuan's daily reference rate by a record 1.9 per cent, to boost the country's exports, amid a slowdown in the world's second-largest economy and the recent stock market crash.

Exports from China, the world's largest exporter, account for 13.7 per cent of the global pie. India's overall exports have contracted for seven straight months until June 2015.

Subramanian said China, on the one hand, has devalued the currency and taken measures aimed at reducing the spread between onshore and offshore rates. "This action is both an endeavour to make their currency a more plausible credible candidate for inclusion in the SDR (special drawing rights) basket," said Subramanian. SDR is an international reserve asset created by the International Monetary Fund to supplement its member countries' official reserves.

Talking about credit growth in the economy, Subramanian said when the wholesale price index is in the negative for eight months, one should not look at nominal credit growth. "Real credit growth has started increasing after declining for several quarters and within that, there is a sharp divergence between real credit growth to the personal sector, which is doing surprisingly well, while it is credit growth to industry that remains relatively weak."