USD/CNY: A Chart for China Bashers to Ponder

♠ Posted by Emmanuel in at 3/17/2008 12:50:00 AM

Those who follow various currency regimes may wonder, what exactly is a "managed float"? Well, wonder no more and inspect the six month chart of the US dollar / Chinese yuan above. As you can see, the Chinese have "managed" to keep about a 60 degree slope in the chart of gradual yuan appreciation. Since the yuan first floated in July of 2005, it has gained about 14.5% in value against the dollar. Indeed, the pace has been quickening as of late with nearly 6% of that appreciation coming since October of 2007. Brad Setser likes to point out that China is still piling on reserves at an incredible clip to disabuse anyone of the notion that it's just letting the currency find its natural level in the market. With inflation running high in the country partly due to its forex shenanigans, it may be time to allow for faster yuan revaluation.

By how much is the yuan still undervalued? A simple application of the PPP approach, the Big Mac Index, suggests this may be over 50%. While we are not likely to see gains of that magnitude, I expect to see gains approaching 20% in the near future as China attempts to deal with both inflation and protectionist pressures from the US and the EU. Maybe, just maybe, the Chinese are making a good faith attempt to increase the yuan's value--but, in a gradual, controlled manner as PRC officialdom is wont to say.