It is obvious to anyone who follows Forex rates that the Chinese currency is pretty much in lock-step with the value of the US Dollar. Even when fundamental economic factors would drive the Yuan higher, or the Dollar lower, the Yuan shadows the Greenback. The magnitude of the variability between major currencies often sees their values drift within a band of as much as ±3%, but the Yuan sticks to the Dollar like glue. Last week, for instance, the Dollar slipped by 1.8% against the Yen and 1.4% against the Euro, but the week saw it strengthen by 0.02% against the Yuan – in other words, the Yuan weakened by an identical margin to the Dollar against the other two currencies.
If the USA were to officially decide that the People’s Republic of China was manipulating its currency a raft of measures would need to be taken against China. Consequently, the US stops short of calling a spade a spade and urges the Chinese to allow the Yuan to appreciate against other major currencies. Many analysts claim that the Yuan is at least 20% undervalued, so if ever this does happen, long positions on a stronger Yuan are likely to make a decent profit.
In its most recent commentary, the US Treasury states that the Yuan is “significantly undervalued” and suggests that it must appreciate if China and the global economy are to enjoy stable growth. A cheap Yuan means that its exports to the rest of the world are cheaper than market forces would dictate, giving China an unfair trading advantage, a position exacerbated by the fact that imports from her major trading partners are relatively more expensive in China than they should be.
The report notes that: “China has continued large-scale purchases of foreign exchange in the first quarter of this year, despite having accumulated $3.8 trillion in reserves, which are excessive by any measure. A stronger RMB (Yuan) would support domestic consumption by increasing the purchasing power of households, and encourage a shift from tradable goods production to production of domestically-oriented goods and services. A market-determined exchange rate would allow China to reduce its intervention in the foreign exchange market and give Chinese authorities greater control over liquidity creation and domestic monetary policy.”
China recognises that tapping into its potentially enormous domestic demand is key to generating sustainable growth in the long-term and this would mean opening its markets to global imports. However, much of China’s recent growth has been due to surging exports to the rest of the world. It has frequently been accused of price dumping and subsidies to help it strengthen its position in global trade as the world’s second largest economy.