Calls for yuan revaluation grow louder

According to Bloomberg News, finance ministers of the G7 nations, currently meeting in Washington are once again expected to issue a strongly worded statement prodding China to do more with an undervalued yuan. The traditionally US championed trade tussle is getting some very vocal support from the Europeans and the Canadians this time around.

Of course, Beijing will tell you that its ongoing currency reform is doing just great: the yuan gaining roughly 10 percent against the US dollar since 2005, 3.9 percent just this year. But, with the greenback in a free fall, hitting decade lows against all major currencies except the Japanese yen, China’s argument is misleading if not deceptive. For example, the yuan has actually fallen on the year versus the euro and the Canadian dollar, down 4.1 percent and 13 percent respectively. In other words, if one believes that the exchange rate should reflect a nation’s macro economic condition, China, with the world’s fastest growing major economy is still very much trying to keep a lid on the yuan as opposed to letting it float toward market value. The only difference is Beijing has channeled some of the exchange pressure from the US dollar into other currency markets, presumably to appease American policy makers and diversify China’s economic dependence away from a less than friendly Bush administration.

America’s gain is Europe’s loss. The latest EU figures showed trade deficit with China for the first seven months in 2007 soared 25 percent to a record 59.9 billion euros(USD $85.6 billion). A cheaper yuan makes Chinese goods more competitive in overseas markets. “We are concerned, very concerned with the huge trade deficit between Europe and Chinia,” said EU President Jose Barraso after seeing the numbers. Luxembourg’s Finance Minister Jean-Claude Juncker offered an even more dire assessment, “we have a real problem with the yuan”.

It is very unlikely though that China will buckle under international pressure and significantly alter its monetary policy. With the 2008 Olympics only ten months away, stability is paramount. However, equally unlikely is China risk alienating its major European trade partners, nothing a few jumbo jet orders can’t fix.

Jay Sheng is Shanghaiist's Business Editor. Email tips, news and gossip about business in Shanghai and China to biz at shanghaiist.com.