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Wednesday, May 18, 2005

China's Currency Once More Under Pressure

According to the Financial Times:

"The US Treasury, in its twice-yearly report to Congress on exchange rates and trade, stopped short on Tuesday of accusing China of currency manipulation but made clear it expected revaluation within six months".

Actually this caused more protest in the US than in China - where they will certainly be in no hurry to be seen to be acting under US pressure. The Economist has a global agenda post on the state of China's currency.

Read-on in Comments

1 comment:

Edward Hugh said...

As the Economist notes: "The political logic of tariffs is clear; the reasons for pressuring China to revalue, less so".

That is: the political benefits (as opposed to the negative economic consequences) of imposing tariffs are clear, but currency revaluation (?) - neither economically nor politically is it clear what will be achieved.

"But even if China does revalue, it will not be the salvation that American politicians are praying for. First, it is highly unlikely that the yuan will be allowed to rise very far; even optimists expect a revaluation only in the range of 3-10%, which will still leave the currency seriously undervalued.

Moreover, the effects of a relaxed peg on America’s current-account deficit will be extremely modest. China accounts for less than one-tenth of America’s trade, so even a 10% revaluation would only reduce the trade-weighted value of the dollar by 1%—not enough to produce any noticeable change in America’s current account. Nor is it clear that even a big revaluation would help much. Morris Goldstein of the Institute for International Economics estimates that even a 25% revaluation would reduce the current-account deficit by less than 5%

I have a fuller post on this topic here.