Ah, Yuan revaluation worriers: name-calling won’t win the argument for you. But sage advice from a certain investment bank just might.
Monday brought the sound and fury of a letter from 130 U.S. Representatives to the Treasury demanding that it brand China as a ‘currency manipulator’.
Tuesday, however, saw a slightly more subtle note from Goldman Sachs on the BRIC currencies – notable for its argument that the yuan has already been appreciating for quite some time. If you measure it right, that is:
Among the BRICs, the ‘fair value’ of the CNY has appreciated the most against the Dollar since 2000. This has been due primarily to productivity gains. According to GSDEER [Goldman's proprietary 'dynamic equilibrium exchange rate'], the CNY no longer looks ‘undervalued’ against the Dollar, contrary to popular belief…
…there are two possible explanations for this: (1) the CNY has already appreciated almost 20% in trade-weighted terms, and (2) since the global recession China’s current account surplus has begun to shrink as imports have grown relative to exports.
Goldman adds that the Yuan is likely to appreciate in this way by a further 5 per cent in 2010, to say nothing of what it describes as a ‘one-off’ revaluation in the near future. All of which buttresses predictions already made by its chief economist and all-round BRIC-meister Jim O’Neill.
Hmm. Is it really as simple as that, and are these really the factors that would drive an eventual revaluation? We’d note, for instance, BusinessWeek’s report of rising inflation expectations data released by the People’s Bank of China on Tuesday.
One other thing, however. Goldman’s report notes that the other BRIC currencies have carried on gradually appreciating — not least Brazil’s red-hot real. Surely it’s not easy to stand by and watch that happen when a vast export rival doggedly maintains its peg to the dollar?
In which case, the other BRICs might start a revaluation debate all of their own — and Monday’s letter might be the least of the unkind words directed Beijing’s way over its currency.
Related links:
Jim ‘the BRIC’ O’Neill’s big call – FT Alphaville
Renminbi rumours – FT Alphaville
Renminbi ructions — to revalue or not to revalue? – FT Alphaville