See also: Chinese Economy 2008
For many years the Chinese Yuan was tied to the dollar, however in July 2005 the yuan was finally allowed to break away from the dollar. However, unlike most other currencies, the Chinese government still try to influence the level of the Yuan. They have tried to keep the value of the Yuan low, to enable Chinese exports to remain competitive. Chinese record growth is due mainly to its exporting sector. The Chinese government fear that if the Yuan is allowed to become too strong, growth will slow causing unemployment to increase.
As a consequence of the undervalued Yuan, China has one of the world’s biggest current account surpluses (10% of GDP) (surplus = value of exports > value of imports)
As of November 9th, the Yuan appreciated to 7.4108 versus the dollar
The Chinese Yuan has appreciated by a small amount since 2005
Graph to show last 5 years Dollar vs Chinese Yuan (remenbi)
Source: yahoo finance
Prospects for 2008
China is being put under renewed pressure to allow the Yuan to appreciate. US trade officials are particularly keen to see the Yuan appreciate so that the US can help to reduce its current account deficit
- Inflation in China is increasing. Chinese inflation is getting close to 5%. This is evidence that the Chinese economy is overheating. An appreciation in the exchange rate would help to prevent growth being too fast. An appreciation helps to reduce inflationary pressures.
- Chinese growth to outstrip rest of world, especially US. With Chinese growth significantly faster than other countries, especially the US. This puts further pressure on the Yuan to appreciate.
- Real Politics. Economics is not the only factor in future exchange rate movements. The Chinese government don’t like to be seen as caving into US pressures.
- My prediction is that the Chinese government will become increasingly aware of the real problem in the Chinese economy, which is inflation and too fast growth. An appreciation would be a very good solution for the long term benefit of the Chinese economy. so I predict the Yuan will go under 7 by the end of 2008