China's Newly Reliable Currency
Daniel Altman is Big Think's Chief Economist and an adjunct faculty member at New York University's Stern School of Business. Daniel wrote economic commentary for The Economist, The New York Times, and The International Herald Tribune before founding North Yard Economics, a non-profit consulting firm serving developing countries, in 2008. In between, he served as an economic advisor in the British government and wrote four books, most recently Outrageous Fortunes: The Twelve Surprising Trends That Will Reshape the Global Economy.
For several years now, politicians on both sides of the aisle in Washington have been accusing China of manipulating the value of its currency. They think China is trying to hold down the value of its currency, making the Yuan cheaper so that its exports are cheaper as well and China's more competitive in the global marketplace.
The problem is, that's not really true anymore. China has allowed the Yuan to appreciate in value against the dollar and Euro and other major currencies, and now there are very few analysts who would say that it's artificially depressed. There's an interesting twist in this, though, because now that China has a somewhat higher valued currency, it's gone out of whack with the Hong Kong currency, the Hong Kong dollar. And there's a huge amount of trade that passes from Mainland China through Hong Kong and vice versa.
So right now, the Hong Kong dollar is still pegged to the U.S. dollar at a lower rate than the Chinese Yuan, and when these things get out of whack it makes it a lot harder to do cross-border trade. The big question for analysts is, when will the Chinese Yuan become convertible? When will it become a currency that we can freely exchange at any rate we want without inference by the government, without any rules about how we can trade this currency? When that happens, the Chinese Yuan could become a reserved currency around the world. It could be that central banks will hold their reserves in Yuan as well as in Euros and dollars and other established currencies.
That will make the Chinese currency a lot more popular, and it'll be a big boost to the value of Chinese purchasing power. They'll be able to buy more things from all around the world and it'll be easier to do business with China. But the thing is that you've got to believe that China and Hong Kong will some day want to share the same currency.
So that means that the value of the Hong Kong dollar will have to rise as well. And there's been a lot of pressure on it to rise lately because people have been buying tons of property and assets in Hong Kong. The Hong Kong monetary authority has been trying desperately to hold down the value of the Hong Kong dollar, but you have to believe in the long term it's going to be at parody with the Chinese Yuan, and that makes a very interesting speculative bet for investors.
In the long term, we need to assume the Chinese Yuan will be a convertible, reserved currency. The question is when, and we just don't know the answer to that.
One of the ways that we can tell that the Chinese Yuan is not really overvalued is that they have almost no trade surplus anymore. The trade surpluses have been narrowing and narrowing for China. That means that they're importing just as much as they're exporting, and those imports are a signal that Chinese consumers have a lot more buying power, and that's very important for China.
China needs to stimulate domestic demand so that it doesn't rely only on demand for its products from around the world. That demand will go partly into imports and partly into things that China produces, but the imports are a good sign so far.
China's actually on the road to becoming a country with a currency that is reliable, that can be used all over international markets. And that's what China wants in the long term.
Jonathan Fowler & Elizabeth Rodd
The old conventional wisdom was the China was manipulating its currency, causing a significant drag on the global economy. That isn't true anymore.
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