Problem of Weak Yuan


The problem of China's undervalued currency in not a recent one. However, with the world economy expected to slow down in 2008 several world economic leaders have become more vocal on their concerns. Last month EU-China summit took place in Beijing and this week U.S. Treasury Secretary Paulson was visiting China. The weak yuan has been blamed for global imbalances in trade and European and U.S. officials are pressing for its faster appreciation.

In fact, both American and European officials have enough reasons to complain. The yuan has been appreciating very slowly against the dollar and it declined about 5 percent against the euro in 2007.

Until very recently, the EU trade deficit with China had been very modest, but now due to strong euro it's reaching all times highs. Last year, Europe's trade gap with China reached €131 billion and this year it is forecast to reach €150 billion if not even more. A weak yuan is making Chinese imports cheaper it's a threat for European's exporters.

U.S. situation looks only slightly better. Even though we saw an 150 percent increase in U.S. exports to China during the last four years, this didn't help that much. The trade gap between China and the U.S. has grown to a record $25.9 billion in October as the volume of imports from China rose much larger.

China doesn't seem to put much effort on further yuan appreciation. It is said that yuan is kept artificially low in order to boost exports, which is the most important factor of China's economic growth. Chinese officials even argue that the declining U.S. dollar is a bigger concern for the Chinese economy than the appreciation of the yuan against other currency pairs. However, there is no doubt that a more flexible exchange rate policy would help China to sustain the fastest economic growth within the world's 20 largest economies and protect the world's most populated country from the highest inflation in 11 years.


Anna Fedec, analyst@tradingeconomics.com
12/13/2007 9:02:54 AM