The revaluation of the yuan has begun
It was two years ago that Senators Schumer and Graham were agitating for a 27% tariff on Chinese goods because the yuan was pegged at 8.28 to the dollar. That value has changed rather significantly in recent times. The 8.28 rate is 12% higher than the 7.39 rate that the yuan / dollar exchange rate traded at the other day. WSJ:
Beijing may be permitting faster appreciation of its currency ahead of talks with major trading partners, starting next week with the president of France. The U.S. dollar finished Friday trading in Shanghai at 7.4060, after slumping as far as 7.3912 yuan during the session. Traders said they expect to see more strengthening in the yuan next week as well. The Xinhua News Agency described the yuan’s rise Friday as its 73rd record high so far this year. Indeed, the yuan has strengthened 12% since July 2005, when a 2% revaluation ended a decade where Beijing held the exchange rate static around 8.3 yuan to the dollar. The Chinese currency is up 5.4% this year.
“I think [the People's Bank of China] would like to be able to convince Europe that the yuan is starting to appreciate at a higher rate,” said a dealer in Beijing for a China-based bank. Over the weekend, French President Nicolas Sarkozy is due in China and is expected to comment during his visit that the pace of yuan appreciation has disappointed the European Union, China’s biggest trading partner.
U.S. Treasury Secretary Henry Paulson is expected to visit Beijing on Dec. 12 and is expected to carry the same message. Early Friday, traders in Shanghai focused on a new record high for the daily central parity rate set by the People’s Bank of China, the pivot point for a trading band that is theoretically as wide as 0.5% per session. The dollar parity was set at a record high of 7.3992 yuan.
Also, some traders said they smelled a political motivation in a relatively sharper jump in the yuan’s parity level against the euro, to a record of 10.9956 yuan from the previous session’s record of 11.0070 yuan. The euro finished the session at 10.9791 yuan. “With top EU officials visiting Beijing…there’s a lot of pressure on the yuan,” said a Shanghai-based dealer with a foreign bank.
China’s exports are up again massively — 27% this year to an annualized rate of about $1.2 trillion for 2007. Meanwhile, EU countries’ industries have been suffering for years, as have many in the US, with the weak yuan. The structural imbalances in the current accounts of the importers and exporters are ample evidence. That would appear to be changing now.
It remains to be seen how the coming exchange rate regime distributes the effects of the changes among: (a) slower growth in China; (b) increased inflation in the importing countries; and (c) profit margin pressure on Chinese manufacturers; among other factors in play.
We would guess that one aspect of the Bush administration’s weak dollar policy has been to use the market to exert pressure on China’s exchange rate, and that appears to have happened, to a non-trivial extent. However, China needs 7% GDP growth to keep employment steady, and its economy is 70% dependent on exports for that growth. So we are perhaps entering a time of increased uncertainty and potential instability for China itself, after two decades of Goldilocks growth. We’ll just have to see what happens.