Wednesday September 27, 2006 - 20:37:08 GMT
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Free Market Yuan?
When I was in graduate school I wrote a paper on the Chinese Banking system. In those days state banks, there were no others, kept semi-imaginary accounts of debits and credits, loans were assigned by state planners, repayment was the exception, default was endemic and without penalty, and financial transparency was zero. That was only 20 years ago. When considering Chinese economic policy it is best to keep Chinaâ€™s extraordinary transformation in mind, not because it is unique, which it is, but because it will accustom the critic to the long view.
Wednesday the central parity rate for the Yuan was set at 7.9072 against the dollar. That is a 2.5% appreciation from the 8.11 rate enacted last July when the dollar peg was abolished and 4.7% from the long time 8.30 fixing. 2.5% over 13 months is not a large move by currency market standards. Since last November the Euro has appreciated more than three times as much (9.13%) against the dollar. But for an economy whose currency that was pegged at 8.30 (give or take 0.3%) to the dollar for 10 years it is an enormous and very rapid alteration.
The Chinese planners have managed their most astonishing economic renewal by keeping their eye on the generational horizon. There have been many arguments from Western governments, our own included, over the past 10 years urging Yuan revaluation and criticizing the Chinese for deliberately keeping the Yuan undervalued for trade and growth. Undoubtedly there is truth to those arguments. Chinaâ€™s growth has been export led and capital intensive and both benefit from a cheap Yuan. The deciding factor in Chinese economic deliberations has not been external pressure but what is useful for the domestic economy. Chinese goods and Chinese governmental purchases have given the government great clout in Western capitals. If the Chinese have moved the Yuan to a trading band it is because the band will help defray some of the inflationary and expansionary dangers lurking in their economy, not because they are concerned about the American Congress or the Eur/Yen cross rate.
The question is often asked will the Yuan ever be freely traded? The Chinese government has given us the answer. â€˜Yesâ€™. The band is a step along that road. But the Yuan will not join the currency markets until a free market Yuan is in Chinaâ€™s best interest and that destination, if no longer generational, is still years away.
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