Thursday, February 18, 2010

Revaluing the Yuan (Again)

A post at China Law Blog and an article in China Daily reminded me that I wrote about the possibility of China revaluing its currency and the effects that it may have on the Chinese and American economies.

The China Daily article quotes IMF economist, Olivier Blanchard as saying that a revalued Yuan will improve the US economy, but will not solve the severe economic problems of the country. However, Blanchard also said that China should appreciate the currency by about 20 percent.

Looking back on what I previously wrote, Blanchard's statement makes sense. I still believe that if China allows its currency to appreciate it will help businesses in the US as they will be able to sell more products at lower prices in China. But, it will not create jobs in the US. In the long term, it won't help enough.

It is possible that China will act soon on the Yuan. The country is in a strong position to do what it pleases with currency. The reason I believe the Chinese government may act soon is because it sold off $34 billion in US Treasury debt. It may look like it is economic retaliation for arms sales to Taiwan, but it may also be that China wants more profit. If the Yuan appreciates 20 percent, the Chinese government will lose money on the US Treasuries it purchased. It's smart financial planning to cash in those holdings early.

Even with signs that the Yuan will be revalued, it's anyone's guess if it will happen. I doubt it will appreciate 20 percent in the near future as China prefers to slowly adjust the exchange rate.

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