Tuesday, June 07, 2005

¿Buy or sell yuan?

Bill Cara: Cara Investment Reports: Chinese Yuan Revaluation
As readers are aware, some U.S. politicians and market strategists are pushing hard to put more pressure on China for appreciating its currency. Many economists have blamed the undervalued Chinese Yuan for the huge trade deficit in the U.S., and have called for an immediate and substantial appreciation of the Yuan to fix the imbalances in the world economy.

The problem with the above views is that they fail to fully appreciate the growth dynamic of the world economy, and the very grave possibility that a sharp appreciation of the Chinese Yuan may lead to a disaster for the Chinese economy, and even the world economy.

Additional voices urging yuan peg to USD
The Kingston-Ont. native argued any change by China — a one-off revaluation of the exchange rate or a shift to a floating rate — wouldn't be in China's own interests, and wouldhave little effect on the root causes of U.S. dissatisfaction.

"Behind this there is a real phenomenon: China's competitive shock," Mundell said, comparing the recent growth of low-cost manufacturing in China to Japan's economic rise in the 1950s and 1960s. He said this shock "isn't a monetary issue and can't be addressed by monetary measures," such as the exchange rate.