Patience may be a necessary virtue in assessing where
and how China intends to take its now supposedly floating currency.
But the signs to date are contradictory. That may be a deliberate
ploy to keep the speculators off balance. Or it may be that a
struggle is still going in Beijing between forces for and against a
significant appreciation of the yuan.
Take the announcement on
Wednesday that the yuan would be floating against a trade-weighted
currency basket headed by the dollar, euro, yen and the South Korean
won, with small contributions from the likes of the Australian and
Singapore dollars, Russian ruble and Malaysian ringgit. That has
been described as a display of transparency, even if we are left to
guess the currency weights and how far they reflect the direction of
China's trade or the currency denomination of it. The list is no
surprise except that, presumably for political reasons, the Taiwan
dollar is omitted, despite Taiwan being in the same league as Japan
and Korea as a source of components for export industries.
With or without Taiwan's
currency, this basket should worry those, not least the U.S.
government, who are looking for significant further appreciation of
the yuan - that is, 10 percent or more - in the foreseeable future.
To start with, the U.S. dollar probably has a weighting of 40
percent or more. Of the others, the euro is 10 percent higher
against the yuan than it was two year ago, the yen 8 percent higher
and the won 13 percent higher. Among the minor basket components,
some, like the ringgit, have stuck close to the dollar while others,
like the Australian dollar (up 13 percent), Russian ruble (up 5
percent ) and Singapore dollar (up 4 percent), have all risen
against the Chinese currency.
There is certainly scope
for these other currencies to appreciate further, given the strength
of their trade and competitiveness. Commodity currencies such as
ruble and Australian dollar could also rise further if prices remain
high. Nonetheless, given the extent to which the non-dollar
currencies in the Chinese basket have already appreciated, and given
the U.S. dollar weighting, China seems set for a glacial
appreciation that lags behind those of its neighbors and of the
euro. Those currencies, in turn, will seek to keep their
appreciations to a minimum. That is no recipe for the bold
adjustments necessary to reduce trade imbalances and ward off
On the other hand,
China's announced basket may simply be a deliberate diversion of the
markets, or a signal of its intentions after the yuan has risen to a
rate that Beijing views as economically and politically sustainable.
Evidence for that interpretation comes from the actual performance
of the yuan since the July 21 revaluation and float. If it really
were following the basket, it would have appreciated by about
another 0.5 percent at least since the original 2 percent.
That is because the yen
and won have risen by nearly 2 percent since that time and the euro
by a smaller amount. The Taiwan, Singapore and Thai currencies have
also appreciated. But the yuan, meanwhile, has been oscillating
within a much smaller range. Thus China may be playing a waiting
game and may in due course allow another jump by the yuan against
its newly proclaimed basket rather than staying in line with it.
In short, three weeks
after China made it historic move to stop pegging the yuan to the
U.S. dollar, the world is little the wiser about how China intends
to manage its currency. What should be clear to the leadership in
Beijing, however, is that token moves will not be enough to address
either the economic nor political consequences of seriously
inappropriate Asian exchange rates. These are prolonging U.S.
consumption excesses in a way that brings short-term benefits to all
but threatens a crisis not far down the road.