Tuesday, October 11, 2011

Battle against yuan

US Senate just passed a bill that would lead to trade sanctions against countries whose currencies are manipulated. One currency on the legislators' minds is, of course, the yuan. The past two weeks has witnessed China's currency moving in exact the opposite directions in the onshore and offshore markets. During such a bumpy ride, we already saw that Beijing has sent its goodwill to the US to avoid future diplomatic and trade conflicts, but the passing of such a bill could only make things worse - for both countries. The question here is that, is yuan being manipulated?

The chart in today's The Economist speaks far louder than politics does. It suggests, "the recent relationship between China's currency and America's trade deficit with China is not what China hawks in the Senate think it is. Rather than a cheap yuan leading to a flood of Chinese imports, the yuan has actually strengthened as the deficit has widened. There are many things American companies dislike about the way business is done in China: intellectual-property theft, the impossibility of winning government contracts, baffling rules on corporate ownership and so on. However the place for fixing these things is the World Trade Organisation, not Congress."

Will this bill alter anything in a significant way? No, says Wall Street Journal columnist Tom Orlik. He further suggests that neither US politics nor China's "narrower self interest" could derail the fundamental strategy on the yuan.

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