Friday, October 23, 2009


After allowing a limited appreciation of the yuan from mid-2005 to mid-2008, China has tied its currency tightly to the dollar over the past year.

(note: the figure is the yuan price of $ so the fall represents a yuan appreciation)

In his Times column, Paul Krugman says China's policy of intervening to prevent the Yuan from appreciating is "outrageous" -
Although there has been a lot of doomsaying about the falling dollar, that decline is actually both natural and desirable. America needs a weaker dollar to help reduce its trade deficit, and it’s getting that weaker dollar as nervous investors, who flocked into the presumed safety of U.S. debt at the peak of the crisis, have started putting their money to work elsewhere.

But China has been keeping its currency pegged to the dollar — which means that a country with a huge trade surplus and a rapidly recovering economy, a country whose currency should be rising in value, is in effect engineering a large devaluation instead.

And that’s a particularly bad thing to do at a time when the world economy remains deeply depressed due to inadequate overall demand. By pursuing a weak-currency policy, China is siphoning some of that inadequate demand away from other nations, which is hurting growth almost everywhere. The biggest victims, by the way, are probably workers in other poor countries. In normal times, I’d be among the first to reject claims that China is stealing other peoples’ jobs, but right now it’s the simple truth.
After a spike during the financial crisis, when it was (ironically) seen as a safe-haven, the dollar has resumed its decline:
(note: the figure is the $ price of euro, so a rise denotes a dollar depreciation)

Because the dollar is declining relative to the euro and other currencies, the yuan is following it downwards. As Dan Drezner points out, the real losers are other countries with "strong" currencies:
[T]he United States is not the country that's hurt the most by this tactic. It's the rest of the world -- articularly Europe and the Pacific Rim -- that are getting royally screwed by China's policy. These countries are seeing their currencies appreciating against both the dollar and the renminbi, which means they're products are less competitive in the U.S. market compared to domestic production and Chinese exports.
Ambrose Evans-Pritchard also sees signs of tension:
What concerns European policymakers most is the lockstep rise against China's yuan. Beijing has clamped the yuan firmly to the weak dollar for over a year, quietly benefiting from the export advantages. It accumulated $68bn (£41bn) in reserves in September alone as a side-effect of holding down the currency. Fresh reserves are mostly being invested in eurozone bonds, pushing the euro higher.

French finance minister Christine Lagarde said it was intolerable that Europe should "pay the price" for a dysfunctional link between the US and China. "We want a strong dollar, and we have reiterated it again in the strongest manner," she said after this week's Eurogroup meeting. China's trade surplus with the EU reached €169bn (£154bn) last year.

Indeed, as the Times reported last week, China's share of world trade has grown - while its exports have fallen in the recession, most other countries have seen bigger declines:
A recent Times story on the benefit to US exporters from the falling dollar also notes the pain in Europe, and Willem Buiter blames the ECB for overly-restrictive policies.

Also, Krugman explains the "yuan" / "renminbi" thing.

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