Mervyn King, Bank of England Governor, said during his press conference that he will use the Group of 20 meeting to convince China to speed up the yuan’s appreciation. G20 meeting will be held near Cape Town, South Africa, this weekend on November 17–18 and one of the prevailing topics would be China’s monetary policy.
It is hard to believe that Chinese Central Bank official will be persuaded into changing the way yuan is controlled easily; one thing for sure though, King won’t be alone.
Depreciation of yuan against euro and pound is causing a threatening danger of trade balance deficit for European Union and United Kingdom. And while the inflation in these countries grow, currency intervention isn’t a good choice to depreciate one’s currency against yuan. Fed sees cheap yuan as one of the major reasons of U.S. enormous trade balance deficit, which can be partially “cured” with more expensive yuan.
Chinese yuan is almost completely controlled by the People’s Bank of China with very tight market float boundaries. U.S. tries to change this situation for several years already. Maybe now, with combined help of ECB and BoE they can present some convincing arguments to make China act more quickly. Europe already promised to strengthen its protectionism policy (which is aimed mainly against imports from China) if Chinese officials will not take definite steps towards yuan appreciation. One of the possible outcome, if King, Trichet and Paulson succeed, can be a freely traded yuan, which will greatly change the current Forex market layout.
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