Tuesday, October 31, 2006

Rate of Yuan Apprection Increasing-But Only Slightly

After the initial move from the more than decade old peg of the yuan to the dollar at an exchange rate of 8.28, when the yuan was revalued by 2.1% to 8.11, the yuan have continued to increase in value, but only very slowly. One year after the revaluation, the yuan had increased just another 1.5% in value, to 7.99.

Today (October 30), a little more than 3 months later, the yuan have increased another 1.5%, to 7.8728. So, the rate of appreciation is increasing, but it is still far too slow for China's own good.

Interestingly, China does however seems to have reduced , if not halted, the inflow of "hot money" trying to profit from the revaluation, further increasing the need for increased foreign exchange reserves. During the third quarter, China's goods trade surplus was $50 billion. And usually the current account surplus is an additional $15 billion. Yet the foreign exchange reserves rose "just" $50 billion. This indicates a net capital outflow of $15 billion. Brad Setser and Richard McGregor thinks this reflects that state owned Chinese banks are accumulating dollar assets instead of selling them to the central bank. This would imply that the accumulation of foreign assets by state owned entities in China is growing faster than the official reserve number indicates.

They may be partially right, but it also seems likely that net private capital inflow was sharply reduced, if not halted or partially reversed.


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