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Home > Investment Memo > China Economy
Yuan Undervalued, in Politics or Economics Terms?
AuthorMaogeUpdate2010/3/23 16:10:10Browse712120
Over weeks, Chinese currency value was under grill, and it was at the burning point on March 15th when 130 US Congressmen in a letter accused China of artificially manipulating its currency, RMB, value low.

In the West, it is said that RMB is undervalued by 25 to 40% to U$ and other currencies. And in the US, an estimate of 41% devalued against U$ by Peterson Institute was widely picked up. Here is a question, how were the numbers figured out? Since RMB is nonconvertible at the moment, there is not a market for RMB valued by supply and demand, so all the figures must be calculated by an assumption. As a Consequence, a bias assumption could not be avoided while an exchange rate is put at front of a countrys interest.

In addition, it matters in considering Yuan value from the angle one stands. For example, Economist (March 17th) cited again the so-called Big Mac Index showing its readers yuan is 49% below its fair-value benchmark with U$. I have 2 questions: 1) while looking at Big Mac price, why Economist forgot Macs labor cost in China? 2) why didn't Economist pick up Costa Coffees China prices as instead to show its readers?

The conclusion is arbitrary for a political purpose in the letter that the US politicians blamed China for maintaining Yuan devalued from the US-China trade deficit only. Similarly, any figures above calculated could not be more than a political purpose either. 

No one denies Chinese currency has been a political issue for a long time. It is no surprise that it is now becoming hot button again. As Jim ONeill puts its unfortunate that we (the West) have so much political angst around this.  since Yuan actually isnt particularly undervalued anymore. 

Is Yuan undervalued? It depends on your looking at it in a Politics way or an Economics way.

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