Wednesday, September 29, 2004
Now may be the time.
Chinese Premier Wen Jiabao said in Beijing Tuesday that China will adopt measures from a number of aspects to improve exchange rate mechanism of Renminbi (RMB), the Chinese currency, in a steady and appropriate manner.
"We will further advance the reform and forge a mechanism which is more adapted to the changes in market supply and demand with still better flexibility," Wen said, acknowledging this reform represents a systematic project involving a host of aspects.
Many have suggested a float of the currency, usually after a period where it trades within a band against a basket of currencies larger than they currently use. But one wonders if it's in China's best interest to do so.
``If a stronger yuan were in the best interest of China, it would have let its currency appreciate, or formally revalued it, a long time ago,'' says Carl Weinberg, chief global economist at High Frequency Economics in Valhalla, New York.
China's financial system is mess, and home to untold numbers of non-performing loans. Officials in Beijing know it's simply not ready to face the unpredictable views of currency traders who would decide the yuan's value.
The Chinese have been slow to respond so far, and it may be prudent for them to continue this way. The IMF and most economists argue it's less costly to exit the pegged exchange rate when things are going well, but the "if it ain't broke" philosophy probably is at play.
UPDATE: Shawn says this is too esoteric, and maybe he's right. Here are the issues at play here. First, the yuan is undervalued, which is helping to contribute to our trade deficit. Local manufacturers to whom I speak complain of everyone "wanting American products at Chinese prices". My response to them is normally, "if the Chinese want to sell us good stuff cheap, American consumers benefit." But if the Chinese would let the yuan appreciate versus the dollar, the price of Chinese imports to America will also rise.
Second, for two reasons I think the Chinese are not going to make a big move on their exchange rate. I stated these reasons before, but I'll elaborate. First, the biggest problem the Chinese have isn't an undervalued currency but rapidly expanding economy that is creating bottlenecks. Chinese willingness to buy raw materials at premium prices is causing problems for U.S. manufacturers; the cure for that is to tamp down demand for raw materials in China, and letting the yuan appreciate isn't going to be much help with that. Second, the effect of floating the yuan on Chinese bank balance sheets isn't all that clear; it might really hurt them at a time when they already look a little dodgy.
The Chinese may have felt they had to say something about exchange rate policies due to their presence at the G-7, but I'm skeptical whether there's any real news here or if it's just talk.