The Chinese Yuan

The Chinese Yuan – International Finance

Over the past five years, the Chinese Yuan has gained value against the USD and other major currencies. As of today, $1 equals about 6.65 CNY, which is a slight increase from January 2006, when $1 equaled about 8.10 CNY. Nevertheless, the CNY is still very “cheap” compared to the USD although it is the highest value since 1997 (between 1997 and 2005 China managed to keep the CNY at a peg of 8.21 to the USD).

If the CNY should de- or appreciated depends on the point of view: for the Chinese, depreciation or at least holding on to today’s value would be favorable.

* A cheap CNY would help them increase jobs at home

* A cheap CNY will help them continue to grow their exports

* It would prevent to drive capital into china and therefore may help to prevent future capital bubbles

For the US and especially European exporting countries like Germany, appreciating the CNY would be better:

* It would devalue their foreign depts. Held by the Chinese

* It would help Yuan holders and all exporting countries that do business with China

* It would help them domestically because manufacturing companies would be more competitive and therefore could hire more people, which would decrease unemployment domestically (One of the main complaints of western countries is that China is not only exporting cheap goods, but also unemployment).

In order for the CNY to appreciate, China would have to agree to significant changes:

* Becoming part of the world’s financial and currency system

* Let the People’s Bank of China become more independent and make their own decisions

Some of these changes will have to be discussed at the G20 summit in Seoul, starting tomorrow. While China has signaled that it may be willing to compromise on some issues, it also has stated that changes will not happen in the near future and has warned other countries, including the US, not to blame their economic problems on China and the Yuan.