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Home > Investment Memo > China Economy
Yuan Undervalued, in Politics or Economics Terms?
Author£ºMaogeUpdate£º2010/3/23 16:10:10¡¡Browse£º425142
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 country¡¯s 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 Mac¡¯s labor cost in China? 2) why didn't Economist pick up Costa Coffee¡¯s 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 O¡¯Neill puts ¡°it¡¯s unfortunate that we (the West) have so much political angst around this.¡±  since Yuan ¡°actually isn¡¯t 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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