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China’s exchange rate shift won’t save America

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Richard Spencer
London Telegraph
June 21, 2010

I hate to venture where I’m not wanted, and tread on the toes of my colleagues in China and on the business and economics beats. However, I thought I might venture back in time to my posting in China and comment on Beijing’s announcement on Saturday that it would revalue its currency. This, apparently, is supposed to save the world economy, or at least the American one.

The China v the World row over the yuan exchange rate has been the longest-running saga in international relations since the 100 Years’ War, and despite the announcement there’s a few chapters to come. The Chinese are saying there will be no one-off revaluation, and that change will come gradually, by way of shifting trading bands.

This is almost exactly the way the currency appreciated by 21 per cent over three years from 2005 and 2008, when I was in Beijing. Since the Petersen Institute now reckons that the yuan is undervalued against the dollar by 24 per cent, a similar rate of appreciation brings it roughly into equilibrium in three years, all else being equal.

All well and good, you might think. The pegged US dollar-yuan rate has been identified by many, particularly American politicians, as the biggest single contributor to global imbalances – namely the West overspending on cheap Chinese goods and China underspending on expensive Western ones, with a resulting build-up of Western debts and Chinese trade surpluses and foreign exchange reserves. That, in theory, should now change.

Full article here

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This article was posted: Monday, June 21, 2010 at 8:51 am





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