The Economist: “After enduring a decade of criticism for its weakness, China’s currency now looks uncomfortably strong
TEN years ago, the yuan made its debut as a global economic bugbear. In June 2003, America’s then treasury secretary, John Snow, publicly encouraged China to loosen a policy under which its currency was pegged at 8.28 to the dollar. The next month four senators wrote an angry letter urging Mr Snow to investigate China for “currency manipulation”. The country was intentionally undervaluing its currency, argued Charles Schumer, a Democratic senator for New York. “The result is that everything they sell to other countries is the cheapest thing going.”
A decade later, Mr Schumer and other senators are still bashing the yuan: eight of them re-introduced a bill last week that would slap duties on currency manipulators. But much else has changed. Now allowed to float by 1% a day on either side of a reference rate set each morning by the central bank, the yuan closed trading on May 27th at 6.12 to the dollar, 35% stronger than its June 2003 rate. It has risen more against the dollar since March than it rose in the whole of last year, and its climb against Japan’s currency has been even steeper. Since November, when the markets began to anticipate dramatic monetary easing in Japan, the yuan has gained over 20% against a weakened yen.
China’s competitiveness on world markets depends not only on the price of its currency but also on the price of its goods and workers at home. The Bank for International Settlements calculates a “real” exchange rate for 61 economies that takes account of inflation differences between them. Since 2010 China’s real exchange rate, weighted by trade, has risen faster than any other, with the sole exception of Venezuela’s.
The price of labour is also rising faster in China than in its principal trading partners. The Economist has calculated an alternative “real” exchange rate, weighted by trade with America, the euro area and Japan, which takes account of unit labour costs in all four economies. By this measure, China’s real exchange rate has strengthened by almost 50% since Messrs Snow and Schumer began their currency-bashing ten years ago. If the yuan was the cheapest thing going back then, now its cheapness has all but gone. Some economists, such as Diana Choyleva of Lombard Street Research, even wonder if the yuan is now overvalued.”
via The yuan: The cheapest thing going is gone | The Economist.
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