## Wednesday, February 20, 2008

### Yuan Rise Above 14 U.S. Cents

Sometimes when I talk about currency changes, it may seem confusing. For example when I talk about how the yuan rises in value and specifically says it rose from say 7.37 to 7.22 to the U.S. dollar, which may seem confusing as the number stated is falling while I write the value is rising. The explanation is of course that the number I refer to is how many yuan it takes to buy a U.S. dollar on the foreign exchange market, and so if the yuan rises in value it means it should take a lower number of yuan to buy a U.S. dollar. Even so, I can see how it may seem confusing to some.

One way to make it clearer would be to quote the inverted exchange rate, i.e. how many dollars -or more correctly cents- it takes to buy a yuan. Then the rise in the yuan's value would be more obvious, as for example the above mentioned increase in the yuan's value from 7.37 yuan per dollar to 7.22 yuan per dollar would be expressed as an increase in the value of the yuan from 13.57 cents to 13.85 cents.

If one were to express the yuan's value that way,then today it rose through a key psychological threshold. For the first in recent years, a yuan is worth more than 14 cents, or to put it another way 100 yuan is for the first time in recent years worth more than 14 dollars. In the normal way of expressing this exchange rate, this means that the exchange rate rose from 7.1485 yuan per dollar yesterday to 7.1425 yuan per dollar.

As I reported a month ago, the Chinese central bank has clearly increased the rate of appreciation in recent months. At that time, I reported it had risen 2.1% in a month, since then only slightly more than a month has passed and the yuan is up an additional 1.15%.

The reason for this is that the Chinese leaders are increasingly realizing the madness of subsidizing exports at the cost of a inflationary spiral at home, which is increasingly clear after the Fed's agressive rate cuts. What the threats from Senator Schumer and the arm twisting of Hank Paulsson couldn't achive in terms of getting the Chinese to accelerate the rate of yuan appreciation, Bernanke now seems to have achieved by pursuing a monetary policy so inflationary that the quasi-peg that the Chinese had have become unsustainable. That the Chinese are accelerating the pace of yuan appreciation is good for the Chinese economy-but not so good for the American economy (at least not in the short-term).