A couple of good articles about the value of the yuan, both with a similar take. Here’s The Economist:
American congressmen claim that the yuan could be undervalued by 30% or more against the dollar, but many private-sector economists reckon that it is probably only 10-15% too cheap. [...]
China accounts for only 10% of America's total trade, so a 10% revaluation of the yuan would reduce the dollar's trade-weighted value by only 1%.
Marketwatch similarly says:
"It's a fiction to think a 10% revaluation of the yuan would have any measurable impact on U.S.-China trade," said David Gilmore, a partner at Foreign Exchange Analytics.
The gist is that we should not pin our hopes that the trade deficit with China will be solved with a revaluation of the yuan. All well and good.
But here is what is missing from these arguments: we don’t actually know what the right value of the yuan is. It has never been tested.
China revalued the yuan by 2.1% last July and hypothetically allows the yuan to move as much as 0.3% daily against a basket of currencies. Since the big move in July, the yuan has gained only 1.35% against the dollar, greatly frustrating U.S. politicians who argue the Chinese currency remains undervalued by as much as 40%. [...]
"Remember [...] a 1% band was regarded as fixed. And even that 0.3% band is not being fully explored [...]"
So, the yuan might be worth 2% more than it is now, or maybe 40%. (Note the “hypothetically” adverb above.) In reality, it is not allowed to move and we don’t even know what it moves against.
It is my contention that the market benefits from good information. The only way to find out what the yuan is worth is to the let the world vote on it by letting it compete in a free market.
(It is also very much like my stance on politics: the right decision is the one that is freely made by as many people as possible.)
Some are predicting that the yuan would rise precipitously and ruin the world economy. Or it might actually drop further, and ruin the world economy. Most are predicting it won’t be an epiphany either way*.
But again, we need to find out. How do we do this? The US can’t force the issue (in the form of tariffs) and have the outcome be productive. Who can?
Enter the Chinese consumer. There are tens of millions of new middle class in China, the result of its rapid economic growth. Seems to me they will want to buy things. It also seems to me that they will want to buy things from other countries.
If their currency being held down in value, it makes the rest of the world very expensive. Which means the Chinese consumer’s buying power is limited, and therefore their material wealth is less than it could be.
It is my prediction that increasingly powerful Chinese consumers will begin to notice this and press their government to open the currency. Already, China is moving up from simply being the low-cost manufacturing center, the result of rising wages. How long before this new wealth begins to assert itself?
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* Even if we assume that a free yuan would make only a 1% difference in American imports, that’s still, what, $20 billion? I imagine that matters to some people. :)
As much as I would like to think otherwise, I think that the Chinese consumer class is too small and to happy at this point to have any real impact on getting the government to float the Yuan.
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Posted by: Dan Harris | 12 April 2006 at 11:55 AM