The clash between the US and China over the freedom of the yuan’s movement continues. China indeed allowed its currency to appreciate but the US are obviously unpleased with pace of the appreciation and demand from China to let the yuan float more freely. Is the yuan really undervalued and will it appreciate in the future?
The US officials claim that China’s currency is below the level, which can be considered the fair market value, and is hurting the US economic recovery. The US President Barack Obama stated: “What weâve said to them is you need to let your currency rise”. He was supported by Timothy Geithner, the Treasury Secretary, who said: “The pace of appreciation has been too slow and the extent of appreciation too limited. We have to figure out ways to change behavior”.
The opposite viewpoint expressed more often, not surprisingly, by the Chinese themselves. Jiang Yu, a spokeswoman for the Foreign Ministry in Beijing, voiced the Chinese view on the situation in response to the US demands:
The appreciation of the renminbi cannot solve the trade deficit with Chinaâ and canât fix the US unemployment problem. Pressure cannot solve this issue, rather it may lead to the contrary.
Wen Jiabao, China’s Premier, claimed that the problems are in the US itself, not caused by China:
The main cause of the US trade deficit is not the exchange rate of the Chinese currency, but the structure of investment and savings. Thereâs a trade imbalance between the US and China, which is not something we want to see. China doesnât pursue a trade surplus intentionally.
More balanced opinion also exists: the fixed rate for the yuan isn’t the major reason for the US troubles but it has its influence. The example of such opinion is the words of Mark Dow, the manager at the Pharo Management LLC:
I am sympathetic to the Chinese argument that the exchange rate doesnât explain all the problems of the trade imbalance, but it contributes to the problems. Obama is becoming impatient. They are forced to be more vocal. Obama isnât ready to expend his political capital to buy time for China to move its currency.
So, will yuan appreciate further? Most certainly. Will the appreciation increase its pace? That’s more difficult to predict. China is likely to continue its policy of slow advance of the yuan but, on the other hand, the US will continue to demand the faster appreciation. The demands had little success thus far but if the other countries would join the US demands, and this topic will be presented at the meeting of G-20 next month, the situation can change. The political issues of China, like the territorial dispute between Japan and China, which intensified after the detention of the Chinese captain by Japan, may also play their role as the deteriorating relationship between China and other countries acts in the favor of the US. Most analysts think that the yuan retain its present trend, unless major change of the economic or political conditions would occur, and will appreciate about 2 percent over the next year. We can expect that yuan will appreciate. Slowly.
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