Yuan May Appreciate in Third Quarter

Leading business news publisher, Forbes reported that Willy Lam, an Adjunct Professor of History at Hong Kong University opined that China is likely to appreciate its currency by 3-5% starting some time July or August, if the global economic situation looks stable. He said that China is likely to continue its policy of keeping the Yuan pegged to the important global currencies and will float Yuan in a narrow band.

The expected appreciation later this year would be primarily to avoid unpleasant confrontation with the US. China has been facing severe criticism by the US politicians and lawmakers for keeping its currency artificially devalued. According to some estimates, the currency is potentially undervalued by as much as 40%.

This is continually having a negative effect on the global and US economy due to the flooding of cheap Chinese exports in the markets. Many noted economists and US Congressmen have been up in arms against the China’s policy of keeping the Yuan stable since mid 2008 despite the fluctuations in other world currencies over the last year and a half.

Before 2008, China had allowed Yuan to appreciate by 21% since 2005 in a controlled fashion. Since then, the currency has remained pegged to the US dollar without seeing much appreciation for a long period. China has adopted the policy of keeping Yuan stable to protect its export oriented businesses, which are likely to suffer heavy losses in case the Chinese currency appreciates even by a few percentage points.

Professor Lam also said that China is likely to witness a mass exodus of people from the rural to the urban areas over the next thirty years, which will potentially increase consumerism boosting the China’s internal demand and economy.

However, China’s tactics are not being well received in the US as the American businesses are finding it extremely hard to compete against the significantly cheaper Chinese exports. The Treasury Department will soon be taking a call by April 15 on whether or not to brand China as a ‘currency manipulator’. This will in all likelihood trigger measures against China’s exports to the US, which may lead to a head on tussle between the two countries.

The relationships have already been strained between the two nations for few months now, with each side keeping up the pressure on the other. In this regard, Lam’s statements might signal of a possibility of breaking ice on this sensitive issue.

Speak Your Mind