Tuesday, December 22, 2009

Why China Will Not Let the Yuan Appreciate

In one of our earlier posts we had presented the argument, why a rapid appreciation in the Chinese yuan is actually detrimental for the United States. While a rising yuan would no doubt hurt China by making its exports more expensive, it would hurt the U.S. more by curtailing China's current account surplus of U.S. dollars (as exports decline). With less dollars to reinvest in U.S. Treasuries, it will complicate Bernanke's job tremendously as the U.S. tries to raise ~$2 trillion in new debt in 2010. Coupled with a looming supply of short term debt to rollover, Bernanke will be forced to raise rates sooner than he had planned jeopardising the nascent economic recovery underway. Not to mention the huge additional cost to the nation in the form of higher interest payments on the $12 (soon to be $14) trillion of treasuries.
Today Andy Xie who was previously the chief economist for Asia-Pacific at Morgan Stanley, presented some more reasons why China will not, and should not revalue the yuan upwards.

Author: Andy Xie in China International Business Magazine
US President Barack Obama's visit to China has inspired another round of pressuring China to revalue the yuan. Those in the west have learned to play the Chinese game: shouldn't China give Obama face by revaluing its currency higher? When that ploy doesn't work, they can accuse China of stealing jobs from other poor, developing countries.
The stick and carrot approach will build momentum long after Obama finishes his visit. In anticipation, speculators have put up their positions in the non-deliverable forwards market. The gap between the forward and spot price of the yuan has inspired arbitrage: dollars have been converted into yuan in the underground money market. The resulting rise in China's foreign exchange reserves adds to the case for revaluation. Rhetorical pressure becomes market pressure. It looks like a self-fulfilling prophecy.
Read more here.

No comments: