Wednesday, November 11, 2009

China To Resume Yuan Appreciation?

The latest Chinese economic data showed continued acceleration in the pace of economic growth in China, with retail sales, industrial production and exports all strengthening.

Probably as a result of this, China is now hinting that they might soon return to the old "currency basket" system.

Literally the shift for a call from a dollar peg to a currency basket change would only imply an appreciation against the dollar if the dollar depreciates against other currencies. If the dollar would appreciate, then this shift in policy would in fact imply a weaker yuan than under current policy. But during the 3 years (from the summer of 2005 to the summer of 2008) when China officially followed a currency basket, the yuan's movements against the dollar did not have the inverted movements against the dollar's movements against other currencies, so in practice the "currency basket" system is just a code word for gradual appreciation.