Is the Yuan overvalued?

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China has just released data showing a February trade deficit of US$31.5billion. This of course raises the question of whether the RMB continues to be undervalued or whether the roughly 25% appreciation against the USD since 2005 has been enough to bring the currency back to equilibrium. US policymakers still argue that the RMB is undervalued, and I guess the reason that they see it that way is that, well, they’re in the US! In 2010 China’s trade surplus was $178 billion. However in that same year the bilateral trade surplus with the US was $189 billion (there was also a $137 billion surplus with Europe). In 2011 the surplus narrowed to $148 billion, while the goods trade surplus with the US widened (I can’t yet get the full year services trade data). Is this evidence of ongoing currency manipulation?

Take a look at some other countries, say Australia – in 2011 our goods trade deficit with the US was $17 billion – in 2011 Australia’s goods trade deficit with the US was a larger as a percentage of GDP than the US goods trade deficit with China. Clearly artificially low interest rates in the US are aimed at keeping the USD low and giving the US an unfair advantage in trade over Australia. I guess we’ll just have to make them pay in the pool in London?

4 Responses to "Is the Yuan overvalued?"
  1. Isn’t the implication that with the US and (probably) China undervaluing their currencies now is the time that Australian firms should be buying their assets?

    This should continue until any undervaluations disappear. 

  2. Not quite sure what you mean by “unfair” advantage.  Is it unfair that Australia, until recently, has enjoyed a record terms of trade (driven by offshore demand)? As far as I can make out, this is the reason behind the real appreciation of the AUD versus many currencies (including the greenback) and therein lies the loss of international competitveness for tradeables. 

  3. When I am writing about Australia “unfair” is facetious. It is the accusaton commonly made of China’s trade/exchange rate policy, most recently by Mitt Romney for example.

  4. Agree Harry, I’m loading up a shoebox full of RMB as we write. Not only should Australian firms be loading up on Chinese assets, but expect more Chinese acquisition activity as the RMB gets closer to equilibrium, and Australian assets get cheaper in terms of RMB cost.

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