Saturday, December 10, 2011

Chinese Foreign Reserves Are Falling

I noted in October the irony of blaming the U.S. trade deficit on China's policy of a semi-fixed exchange rate considering that the yuan has in fact been far stronger than that of non-Japanese Asian countries with floating exchange rates and for that matter currencies of European countries with large surpluses like Switzerland, Norway and Sweden. I noted that if the yuan had had a floating exchange rate, it too would have likely have dropped.

Now Ryan Avent does the same, and provides us with this chart of how different emerging market currencies have performed against the U.S. dollar in a period when the yuan has appreciated in value somewhat against the U.S. dollar.
He also notes that the Chinese central bank have in fact intervened in the currency markets to prop up the value of the yuan and reduced its foreign exchange reserves.

This isn't proof that the yuan is valued higher than it would have been with a floating exchange rate, but Paul Krugman and many other pundits have asserted that increased foreign exchange reserves proves that the yuan is undervalued. By their logic, the yuan is actually overvalued now.


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