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Wednesday, April 24, 2013

China’s Yuan To Be More Market-Driven

According to the Wall Street Journal, “China's central bank plans to widen the yuan's trading band in the near future, People's Bank of China Vice Governor Yi Gang said  . . . , suggesting that China's leaders will press ahead with change despite the surprise slowing of the economy. ’The exchange rate is going to be more market-oriented,’ Yi said on a panel at the International Monetary Fund’s 2013 spring meetings in Washington. ‘I think in the near future we are going to increase the floating band even further’.” The yuan had risen 0.9% against the US dollar since the beginning of the year, and 1% the previous year. With exports becoming more expensive as a result, the Wall Street Journal reported in April 2013, “China's economic growth slowed to 7.7% in the first quarter, year-over-year, down from 7.9% in the last quarter of 2012. That was well below expectations, leading to questions of whether leaders would continue to press ahead on fundamental economic change, or pull back to help struggling companies. Mr. Yi's comments are an early indication that China will continue to focus on market-oriented reform even if that might make it tougher for exporters who would prefer a cheaper yuan.” The implications are more profound than merely shrinking exports.
 
                                    The yuan in 2011. The steadily rising value suggests that the market viewed the currency as being undervalued. 
                      
With labor costs steadily rising in China and the rising prices of crude oil making shipping half way around the world more expensive, some American corporations began to reassess manufacturing domestically. A trend in this direction would reduce American unemployment, and thus the U.S. budget deficits as there would be less demand for unemployment compensation and food-stamps and more tax revenue. It is not as though it could be expected that everyone in the U.S. would participate in a “non-manufacturing” knowledge economy. To reach full employment, an economy must be diversified and thus able to tap into the various types of labor. It is not as though people are clones, having the same aptitudes.
In the U.S., the unemployed would stand to gain while discount store customers would lose the once-cheap Chinese imports. That is to say, a rising yuan is not entirely in Americans’ interest, financially. On the other side of the world, a rising currency is not necessarily contrary to China’s economic interests. In order to move to a more viable economy, the Chinese government had been urging more domestic demand so the economy would not be so dependent on exports. A recession in the U.S. and E.U. could mean a major downturn in an exports-oriented Chinese economy.
From a big-picture perspective, balance or equilibrium in the global economy is in everyone’s financial interest. Keeping a currency artificially low is like a dam keeping waters from reaching a balance. The pressure from the held-up water can be expected to destabilize the global economy. China’s policy to gradually let the yuan’s value be market-determined is thus a prudent step.

Source:
Natasha Brereton-Fukui and Bob Davis, “China Vows Wider Yuan Movement,” The Wall Street Journal, April 17, 2013.