Should the Yuan Be Allowed To Appreciate?

["Gary Santos" <evs@xxxxxxxxxxxx>]

I would certainly like to hear opinions on the subject matter. I've been
watching the world markets rally and wondered why. That manufacturing index
of NY was just an analyst's excuse, I thought. Strong hands are entering the
market for some other reason. Was it Bernanke, I thought. Or, is someone
betting that the Yuan will be allowed to float? This will certainly create
disposable income in Asia as currencies will have room to appreciate in
tandem. I figure the Euro will correct given its recent rise. Below is an
article on the topic.

Anyone have news on the economy of China?

Gary Santos



Growth will force yuan to float, say top economists

 http://ytlcommunity.com/commnews/shownews.asp?newsid=5871

Two of the world´s top economists say it is difficult to determine whether
the yuan is undervalued or overvalued, especially considering there are
controls on the capital account and interest rates. Agence France-Presse
photo
SCMP.com, Wednesday, March 26, 2003

Conference hears that China will eventually need to let the currency trade
freely to absorb shocks from the global system

By KELVIN CHAN

China will eventually need to loosen exchange controls on the yuan as its
economy develops, although there is no need to make any drastic changes to
the currency right away, two leading economists told a conference in Hong
Kong yesterday.

Kenneth Rogoff, the chief economist for the International Monetary Fund
(IMF), said China faced many challenges as it became part of the world
economy, including the need to liberalise its financial markets and keep up
growth rates.

As China's economy grows it will be harder to keep the yuan within its
current razor-thin trading range, he said. The currency is effectively
pegged to the US dollar because it is only allowed to trade within a narrow
band of about 8.26 to 8.28 to the dollar.

"Over time, China is going to need to move to a more flexible exchange rate
system," Dr Rogoff told the audience at the start of Credit Suisse First
Boston's annual investment conference.

China's policy of not allowing the yuan to float has come under fire in the
past few months from other major competing economies, including Japan and
the United States. Government officials and company executives there have
complained that China has kept the yuan undervalued, giving its exporters a
price advantage.

The mainland will someday need to let the yuan trade more freely to absorb
shocks from the global financial system, said Dr Rogoff, who is based at the
IMF's headquarters in Washington.

"It's going to be impossible to maintain a fixed exchange rate for an
economy as large as China's, so the intention of the Chinese authorities in
making the exchange rate more flexible over time, is appropriate," he said.

Speaking at the same session, Nobel-prize winning economist Robert Mundell
said there was no need for the mainland to freely float the yuan at the
moment.

"China's policy of targeting the dollar has given the yuan an anchor and
policymakers a rudder for determining the best policy mix," said Dr Mundell,
a professor at Columbia University.

There have been complaints about China's restrictions on the yuan, which it
has maintained since 1993. As far back as one year ago, Japan's finance
minister said his country and the US found it "pretty irksome" that the
currency was so weak.

However, both economists said yesterday that unpegging the currency would be
difficult and may cause new problems.

Dr Rogoff said determining whether or not the yuan was undervalued "just
doesn't have an easy answer", especially considering there are controls on
the capital account and interest rates.

"We just don't know whether it is overvalued or undervalued."

If authorities made the yuan more expensive deflation would continue and
unemployment would rise, Dr Mundell said.

Foreign investment would also drop, he said. Such investment rose 54 per
cent year-on-year to US$7.54 billion (HK$58.74 billion) last year, the
Ministry of Foreign Trade and Economic Co-operation has said. Contracted
foreign investment, a sign of future investment, increased 59 per cent to
US$14.2 billion.