Friday, April 22, 2011

Has The Yuan Appreciated Or Depreciated?

There is talk that Chinese policy makers will to a higher extent use currency appreciation to fight inflation. That would be a good idea, but the problem is that so far there hasn't been much of it. Indeed, there has been none against most currencies.

This year, the yuan is up by 1.7% against the U.S. dollar (and currencies pegged to the U.S. dollar, like the Hong Kong dollar). However, because of the weakness of the  U.S. dollar, the yuan is down by 1.9% against the South Korean wondown by 3.3% against the Canadian dollar , down by 3.8% against the Australian dollar, down by 4.6% against the British pound, down by 6.9% against the euro and down by as much as 7.7% against the Swedish krona.

The only other major currency apart from the U.S. dollar and currencies pegged to it that the yuan has appreciated against is the Japanese yen (up by 2.5%). But appreciating slightly against the dollar bloc and the yen is not good enough if the Chinese policy makers want to limit inflation, especially at a time when the U.S. dollar and the yen is declining sharply against most other currencies. As long as the U.S. dollar is as weak as it is now, the yuan must appreciate a lot faster against it to prevent further depreciation against currencies. Only then will the exchange rate be effective in limiting inflation.