Is a rising yuan inevitable?
Posted by Zarathustra in China economyon Oct 12th, 2011 | 9 comments
Let’s face it, China is manipulating its currency. You can call it whatever you want, but China is manipulating its currency.
As part of its trade policy, China has been trying to prevent they Yuan from appreciating quickly. They have also taken the lesson from 1985 Plaza Accord in which the US and others forced Japan to float Yen, and are quite determined not to repeat that. Of course, that did not help with the US’s trade deficit, and Japan is still running trade surpluses two and a half decades later.
Even though the consensus seems to have ruled out a hard landing in China, and that the consensus seems to believe the yuan is a one way bet upward, it is always good to ask the question of whether something opposite can happen when the consensus is leaning to one extreme.
The fact about monetary policy is that you cannot have all of the following three things at the same time:
- fixed exchange rate
- absence of capital controls
- independent monetary policy
China is attempting to do all three, but cannot reallyaccomplish all three things in full. It has a sort of fixed exchange rate with a moving target. It has some capital controls (for instance, capital is easier to be getting into the country than out). And its monetary policy seems to be independent, but in reality isn’t.
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