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Economy Watch
Economy Watch follows the progress of the world economy and offers you our weekly picks. Be sure to visit for the weekly updates.
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November 26 Updates
| China's currency: the dollar and yuan
On his inaugural visit to China, one of the key issues that President Barack Obama raised was the yuan. He urged the Chinese government to allow its currency to rise. However, Chinese President, Hu Jintao declined to reply.
Similarly, other industry experts had also suggested having a stronger yuan. The President of the European Central Bank, Jean-Claude Trichet and the Managing Director of the International Monetary Fund, Dominique Strauss-Kahn were among the many. But China refuses to submit to the foreign pressure. It seems that they will adjust its currency only when it sees fit.
According to a report by The Economist, China allowed the yuan to rise by 21% against the dollar in 2005-2008. Since then the yuan remained in similar rates. This caused the yuan’s trade-weighted value to be dragged down this year by the weak dollar, while many other currencies have soared. Since March the Brazilian real and the South Korean won have gained 42% and 36% respectively against the yuan, limiting those countries’ competitiveness.
Speculation about a change in China’s currency policy arose after the People’s Bank of China changed the usual wording in its quarterly monetary-policy report about keeping the yuan “basically stable” and added that foreign-exchange policy will take into account “international capital flows and changes in major currencies”.
The exchange-rate policy is decided by the State Council. And many policymakers, who are in the Ministry of Commerce, do not support a revaluation at the moment. “We don’t think that it’s good for the world economic recovery, and it is also unfair, that you ask others to appreciate while you depreciate your own currency,” said a spokesman for the Ministry of Commerce.
Over the years, the Chinese officials have become bolder in standing up to the US. During one of the sessions, Liu Mingkang, China’s chief banking regulator, reprimanded the US for its low interest rates and the falling dollar claiming that it was encouraging a dollar carry trade and global asset-price bubbles.
Industry experts argue that a stronger yuan would not only help reduce global imbalances, like the America’s trade deficit but would also benefit China. It would help China regain control of its monetary policy. If the yuan is pegged to the dollar, it is actually importing America’s monetary policy. A stronger yuan would also help rebalance China’s economy, making it less dependent on exports by securing future growth on a more sustainable path.
China resists foreign demands to revalue its currency
Does a stronger yuan benefit both China and the US? If so, why did China resist it?
China fails to recognised that its current exchange-rate policy has given it an unfair advantage over the other countries. It is blinded by the fact that US stand to gain more out of the revaluation and that its currency was pulled down by the sickly dollar recently. China only focuses on other emerging-market currencies which have risen sharply this year.
In 2008, China held its currency steady against the dollar throughout the global financial crisis, while others tumbled. Since the start of the year, the yuan has risen against every currency other than the yen.
China claims that it has been actively involved in the global rebalancing. Its monetary and financial stimulus, domestic demand garnered a 12 percent points to GDP growth this year, with net exports subtracted almost four percent points. Chinese policymakers reckoned that the yuan needs to appreciate in the long term, however, they claimed that it is not the right time because their exports are still falling over the past 1 year.
Revaluing the yuan will allow China to tighten its monetary policy. China’s experience since 2005 shows that a gradual rise encourages investors to bet on further appreciation resulting in swell domestic liquidity. And it would stem expectations of a further rise and caused many exporters to be out of business instantly.
Another reason is that some Chinese economists cautioned that the benefits to America from yuan revaluation are over rated. A stronger yuan would not significantly reduce America’s trade deficit. There is minimum overlap between American and Chinese production. Instead, consumers would simply end up paying more for imports either from China or other producers, such as Vietnam and would be like imposing a tax on American consumers.
These reasons help explainedthe reluctance on the Chinese government. Nevertheless, a stronger yuan would ultimately benefit China’s and the world’s economy by helping shift growth from investment and exports to consumption. It would boost consumers’ purchasing power and squeeze corporate profits.
Experts suggest that China will likely allow the yuan to start rising early next year. Because by early next year, China’s exports should be growing again, its year on year GDP growth is projected to be close to 10%, and its inflation rate will have turned positive. The arguments over the revaluation of its currency will then loom much larger.
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