Chinese Yaun The Powder Keg Currency
Below is a MRR and PLR article in category Finance -> subcategory Wealth Building.
Chinese Yuan: The Powder Keg Currency
Overview
China's economy is the fastest-growing in the world and shows no signs of slowing down. According to Wikipedia, in 2006, China's GDP was $2.68 trillion USD. In 2005, the per capita GDP was approximately $1,709 (or $7,204 with purchasing power parity), still below global standards but rapidly increasing. Thanks to its robust export market, China has experienced uninterrupted growth. It recently overtook Canada as the biggest importer to the US.
Rising Exports
China's exports, particularly to high-consumption regions like the United States and the European Union, are expanding at an astonishing rate. While these exports flourish, China's imports remain minimal, mostly limited to oil. Textiles and toys from China dominate imports in these nations. So, how does all this affect the Yuan's market value?
Currency Pegging and Valuation
For over a decade, the Chinese Yuan was pegged at 8.28 Yuan to the US dollar. This strategy helped keep export prices low, making them more competitive against other Asian countries. This peg has been essential in establishing China as a leading global exporter. However, under US pressure, China increased the Yuan’s value by 2% relative to a currency basket. This basket includes the US dollar, euro, Japanese yen, and South Korean won, with smaller portions from the British pound, Thai baht, and Russian ruble.
Experts estimate that in a quantitative valuation, the Yuan appreciates by about 5% annually compared to the US dollar, suggesting it is undervalued by at least 40%. These estimates consider factors like GDP, trade balance, public deficits, interest rates, and economic forecasts. The Yuan still isn't a freely floating currency.
Global Implications
Should the Yuan begin to float freely, it could significantly devalue the US dollar and other currencies, leading to inflation in countries reliant on Chinese imports. Goods coming from China would become roughly 40% more expensive, reducing purchasing power in importing countries, especially for essentials like oil. The fixed exchange rate currently benefits countries dependent on low-cost Chinese goods, sustaining their domestic consumption-driven economies.
Future Outlook
Although China seems open to gradually increasing the Yuan’s value, there’s no indication it is ready for a free float anytime soon. The Chinese government fears that an abrupt transition could cause structural issues, such as unemployment. If the Yuan eventually floats, it would necessitate significant adjustments from other governments to brace for economic impacts. Observing how China’s economic changes influence global markets will be intriguing, particularly as shifts could diminish the US’s role as a global economic powerhouse.
Disclaimer
This article is intended for general informational purposes only and does not constitute investment advice. Forexplane.com disclaims any liability for losses, including but not limited to, lost profits, arising directly or indirectly from reliance on such information.
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