Tag Archives: exchange rate

Yuan Again Said To Be In Balance With U.S. Dollar

At the end of a fraught week for China-U.S. relations on the diplomatic front, state media aren’t letting the economic side of the relationship get away scot free. The People’s Daily says that the yuan is in equilibrium with the dollar, and may even be too high (here via Reuters). The article, from the Chinese Academy of Social Sciences, the leading think tank, follows U.S. Treasury Secretary Timothy Geithner saying during the strategic dialogue talks this week that the currency should move higher against the greenback to allow for more flexible policy. The yuan has risen by almost a third against the dollar since the peg between the two was broken in 2005.

This is not the first time that Beijing has put forward the proposition that the yuan is now at a reasonable exchange rate against the dollar. Zhou Xiaochuan, governor of the People’s Bank of China, said as much earlier this week at a press conference during the talks, as did a Bank of China report in late March. None of that is likely to mollify American critics of China’s exchange-rate regime. Yet we are relieved, in one sense, to see the China-U.S. relationship returning to familiar ground.

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China’ Economy Slowing Nicely, But Watch The Pay Rises

Manufacturing continues to expand, according to the December Purchasing Managers’ Index compiled by HSBC (via Reuters), but its pace of expansion has started to slacken for the first time during this recovery. With our usual caveat about a single month’s figures, that may be taken as evidence for the widely held belief (ours included) that GDP growth will slow in 2011.

By how much is the question, of course. While we still believe that the answer will be, by not much, and that absent the implosion of any asset bubbles the economy is in good shape, the extent to which inflation moderates will play into the final outcome.  There are signs inflation may have peaked. One factor will be the success of price and supply controls on food. But we are also starting to look at wage pressures on inflation. Minimum wages are due to rise again in the new year — they will rise by 20% in Beijing for example — and these increases will to some extent work their way up from the bottom rung of the pay ladder. We suspect now that we won’t see any further interest-rate rises until after the January numbers are in and policymakers get a better sight of the inflation-adjusted growth prospects. We are in no doubt though that fighting inflation remains the top policy priority. Monetary tightening by other means will continue.

We also think we are seeing a greater willingness in the meantime to let the exchange rate bear more of the burden of dealing with the excess liquidity that is the root cause of the inflation. That is all relative in the sense that policymakers remain opposed to any rapid appreciation of the yuan, but it is no accident that the currency is closing out the year at a high against the dollar.


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