Towards Sanity

So China has finally agreed to revalue its currency. Not without creating much hue and cry. Politics and Finance have been closely linked since Gold started to trade as a standard currency worldwide.
The revaluation though was much awaited, not only will it help in stabilizing the world trade where China was being given unfair advantage through undervalued Yuan, but will give respite to other PIIGS who are struggling to find their feet. It might cause some loss of trade to China and devaluation of its loans given to US, however, this is essential to settle the world economy.
The inflation might rise in the US and Europe (currently the biggest markets for Chinese goods) as most of the imported goods will become dearer. It will be a cause of concern in the EU where government in some countries is putting in austerity measures, however, this will require them to ease the interest rates for the economies to breathe. However, this might lead to further devaluation of EU currencies as easing interest rates will lead to rise in inflation to a certain extent. It remains to be seem what will be their measures going forward.
As for the US, its in a win win situation as its loans repayment was becoming expensive due to its currency gaining stance against other nations.
In the short term by revaluing Yuan, China might face some political tensions at home, but this is a step in the right direction to look inwards and propel internal consumption a Mantra which its neighbor India has been following successfully for some time now. This will lead to infrastructure development and advanced medical facilities to be available, which invariable would attract inflow of FII's thereby balancing its deficit of Dollar outflow in the current scenario. However, this is a painful process as the outside world should be comfortable in investing, therefore helping the government to weed out the shortcomings in the economy.
Also, its a more structured approach as it leads to internal development thereby making the domestic economy more competitive. Also, this would need more investment in the Chinese economy by US, thereby reducing their bilateral trade deficit which stood at $226.8bn. in 2009 and is pegged at around $51bn. as of March 2010. The revaluation would help China in balancing its currency to more realistic terms and open up the world economy to competition yet again.
China holds about $895.2bn. of US Public Debt, which dwarfs the nearest competitor Japan, another biggest holder (read exporter) of US debt by a whopping $111bn.
This might be a major reason for China to have $2.4tr. in reserves. However, revaluation will help China as most of the ‘so called’ developed countries are in dire straits of lending to any other country for modest returns. As they have announced huge bail out packages, which are like a heart surgery and does not come without side effects with one of them being inflation as there are no more industries to be built with most of the products being manufactured in China and services in India. By lending it to a country for development they can not only generate some modest returns but also help their economy not inflate.

India is another such destination wherein they can invest, as its considered to be economically and financially stable; however, the capacity to absorb the world inflows is still not yet up to mark. China, on the other hand with its fantastic bilateral ties with the two of the biggest economies of the world namely the US and the UK, will be in a better position. This would not only help it in balancing its Debt holding in the US, but will essentially ensure that none of the economies dishonor their agreement.
This process might throw some people out of employment as the revaluation might need contraction in supply. It might also affect the stock bourses and real estate industry, which many think is overvalued. However, this effect is only short term, wherein correction though painful is an essential process to stop further refueling of inflation and asset bubble.