A Big Yuan
But can it float?
It strikes me, not for the first time, that Beijing has no confidence in its own currency. Not to mention the ability of China’s exporters or the resiliency of the Chinese economy. That seems strange, given the demonstrated strength of the economy and the growing international experience of Chinese companies. But what else can explain Beijing’s seemingly schizophrenic currency policy?
We hear periodic diatribes from Beijing about how the U.S. dollar is long in the tooth and should be retired as a reserve currency or even as a currency for trade transactions. It is always implied that the yuan should be the new reserve currency, or at least an important part of a basket of reserve currencies.
And yet the yuan has yet to prove itself as an internationally viable currency. Why criticize the dollar when the yuan is effectively pegged to the dollar? (Yes, there is a bit of movement allowed, but not enough to notice.) And how can Beijing claim the yuan is an internationally accepted currency when it doesn’t even allow free use of the yuan by its own traders and companies? This was highlighted in a Wall Street Journal article yesterday about China’s “trial program” to allow trade settlements in yuan. Beijing has had such a lack of confidence in its own currency that it has not been allowing even Chinese companies to settle transactions in the yuan. Now they are beginning to experiment with using their own currency. If this is still a “trial program”, why should the rest of the world have any confidence in the yuan?
I am also mystified that the “trial program” only applies to “most” of the country, apparently twenty provinces and cities. Isn’t this something like allowing New York to trade in dollars while telling Rhode Island to try another currency? It passeth understanding.
Perhaps due to the trial nature of the yuan program, or perhaps for competitive reasons, very little trading is going on in the yuan. Using the odd period of July 2009 through May 2010, the total value of yuan-based transactions was about $6.5 billion. If you consider that China’s imports and exports were more than $1 trillion in the first five months of 2010, the value of yuan transactions is trivial. If the yuan is trivial in China, why should the rest of us care?
Aside from the question of whether or not the yuan is properly valued, no one should take the yuan seriously until it is allowed to float freely and has done so successfully for several years. China has much to gain from flotation. If the yuan is truly overvalued, then floating it will help China to contain its inflation by reducing the relative cost of imports. If it should prove to be undervalued, which I doubt, then China’s currency critics will have been stiffled. And, by dropping the peg to the dollar, Beijing’s economic policies and the value of the yuan will no longer be dependent on the decisions of the U.S. Federal Reserve – which cannot reasonably be expected to take China’s interests into account. Or perhaps the Middle Kingdom now prefers to be monetarily governed by Ben Bernanke? One wonders what Confucius would say.
