Saturday, October 07, 2006

Yuan Rises Above 15 Yen

Regular readers of my blog and other writings from me know that I have long called for China to allow the yuan to rise in value faster. This is in China's own best self-interest for two reasons: first because as long as the yuan's foreign exchange rate aren't allowed to rise, the effectiveness of measures designed to reduce overinvestent will be reduced and to the extent it have an effect it will increase China's hugh current account surplus and therefore contribute to further swelling the unhealthily large foreign exchange reserves, which are approaching a trillion dollars.

And second because China needs to reduce its dependence on U.S. exports, and thus make it less vulnerable to protectionist legislation in America. The result will in any case be reduced export revenues, with the difference being that with a currency appreciation they get their imports, including their imports of oil and other commodities, much cheaper.

There are downsides to this plan and I am really in principle negative to this kind of currency manipulation, but in this case the aforementioned two reasons are so compelling that it clearly outweighs the negative aspects.

But even though I agree , sort of, with Charles Schumer and other China-bashers in Congress that the yuan should rise, I don't agree with their assertion that China's currency policy is more manipulative than currency systems based on the Friedmanite floating exchange rate system. Governments can and do manipulate the exchange rate then too, through the use of interest rates.

A case in point is is how the currency of the other economic gigant in Asia, Japan, have moved versus the Chinese yuan. Yesterday (October 6, 2006), the yuan rose above the 15 yen barrier. While the yuan have slowly but steadily strengthened versus the dollar, the yen have weakened is by some measures record weak. As late as in early 2005, a yuan cost just 12.5 yen, but now it has risen 20% against the Japanese currency.

This is the not the result of free markets, but the direct result of the low interest rate policy of the Bank of Japan. Given this, Senator Schumer and others "should" (No, I don't think they should, but given their premise of acting against countries which makes their currencies artificially cheap it would be logical to do so)really bash Japan more than China for their currency policy.


Post a Comment

<< Home