Yuan appreciation

As was discussed in the previous issue of The Stitch Times, China's policymakers will be hesitant in withdrawing fiscal or monetary stimulus. Interest rates in China are likely to remain on hold for the rest of this year, especially as monetary conditions might tighten after the central bank's latest decision to increase flexibility of the Yuan exchange rate.

However, while projecting the impact of appreciation of Yuan, one would be less than fair if one were not to take into account the experience of Yuan appreciation in the recent past. Look at the past data. From July 2005 to July 2008 China revalued the Yuan by a whopping 21 %, an amount far greater than we can expect this time around. From January 2006 to January 2009, China's FOB prices rose by an even more whopping 27%. However, when the value of the Yuan stabilised at its new level, a funny thing happened. FOB prices, rather than remaining steady, fell by 11%.

To sum up, while China would have to content with some appreciation of Yuan, which by itself may not be cause for any big concern, but certainly when it happens in concert with other factors, as referred to above, the situation for China's continued growth may not be favourable, to put it mildly.

Originally published in: The Stitch Times, August-2010

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