FT Alphaville pretty much says it all:
More yuan appreciation, real-ly?
A report Wednesday morning from Reuters, which spots an article in a Chinese-language newspaper:
China will let the yuan rise about 5 percent against the dollar in 2011 to combat inflation, an official newspaper said on Wednesday, while a former central bank adviser said the country needs to free up the currency. …The yuan’s gains would be particularly strong in the first half of this year, the China Securities Journal said in a front-page editorial.The Chinese-language newspaper is a leading voice on domestic economic affairs. Its views do not represent official policy, but do shed light on thinking in Beijing. Investors expect the yuan to be about 3 percent higher in a year’s time, according to pricing in offshore forwards markets. China let the yuan rise just 3.6 percent in 2010.Last year there was much frustration among US policymakers with China’s unwillingness to allow the yuan to appreciate more, especially after the country promised to do just that in June. In October, US politicians put forward a punitive bill as retaliation, though it didn’t go anywhere.
At the time we recommended this sharp analysis by Ed Dolan, who explained why everyone should calm down:
In nominal terms, the yuan has strengthened about 2.5% since China’s June 19 decision to ease its currency policy. That works out to an annualized rate of nominal appreciation of almost 8%. The simplest way to calculate real appreciation is to add on the difference between China’s inflation rate (3.5%, according to August data) and US inflation (about 1%, or even less if the dip in the September figures holds up). Doing so gives us an annual rate of real appreciation of more than 10%. Two or three years of that would pretty well eliminate the 20 to 40% undervaluation that critics are talking about. …In order to slow the rate of nominal appreciation, the PBoC would have to step up its currency intervention. Chinese inflation is already accelerating month after month. Slowing nominal appreciation from its recent 8% pace would increase inflationary pressure even more, both by keeping import prices from falling, and via the newly minted yuan that intervention pumps into China’s domestic money supply. With inflation accelerating further, the rate of real appreciation might not slow by much, if at all.As Reuters says, China allowed the yuan to rise 3.6 per cent (nominally) last year, but have a look at this chart from The Economist showing the difference between the nominal and real appreciation in the yuan last year:
As you can see, all of that appreciation took place after June, and the real rate of appreciation was closer to 8 per cent for the whole year....MORE