It's not the yuan, silly

[Dover]

Apr 14, 2005

It's not the yuan, silly
By Francesco Sisci

BEIJING - First, they said it must be devalued. Now they want it to be "revalued".

It was the eve of the 1997 Asian financial crisis when the world first raised the chorus for yuan's devaluation. The logic of the markets then: the economy is in a shambles and the banks have run up unmanageable debts; if the yuan is not devalued, Chinese exports would soon become too expensive to hold their position and foreign capital would stop flowing into the country.

The Chinese government then thought there was little to gain from devaluation. It would trigger another round of competitive devaluation from other Asian currencies, which would eat into the newfound advantage of the yuan. So Beijing decided to hold on to its fixed peg to the dollar and boost exports by cutting taxes on exporting companies so that commodity prices went down in dollar terms. The strategy won. Asian currencies stabilized, the dollar went slowly down vis-a-vis other Asian currencies and the new kid on the block, the euro.

The lesson that China learned was that with currencies, one should not lose one's head, even if everyone else in the market is losing theirs. This is a lesson worth keeping in mind amid today's chorus for revaluation. Pundits point at China's long-lasting trade surplus, the gains in its labor productivity, the bulging foreign reserves, the low inflation rate and the country's contribution to global growth to draw the conclusion that yuan is going too cheap. Among their many arguments: a can of Coke or a Big Mac in China costs half of that in the United States, hence the yuan must go up 20-40%. ...cont'd

http://www.atimes.com/atimes/China/GD14Ad05.html

[Robert Oak]

1. floating the yuan is sorely needed

currency manipulation is one way they are getting an unfair advantage...
of course giving away our industry, our intellectual property
and having our multinational corporations literally give them free
university level education in science in engineering isn't helping
the US economy and trade deficit either...
but floating the yuan would be a major improvement.