Something's gotta give

China has chosen to widen the band on its Yuan exchange rate, starting today, allowing its currency to fluctuate a further one half of a percent either side of the peg. However most people can only see the Yuan appreciating. This makes our recent articles on the ballooning money supply of China, caused by its undervalued exchange rate, quite timely (that’s my version of a brag). Following China’s gradual easing of its capital controls, it was either going to have high inflation or a higher exchange rate. It also shows that china is not going to be bullied by anybody about its exchange rate. When the US was screaming the loudest about the Yuan being undervalued (which as we said causes large exports) China’s trade surplus was massive (when exports are larger than imports it’s called a trade surplus) boosting the economy along!  But the data of late on Chinese trade has shown a drop in exports! If China was going to bow to US pressure to raise its exchange rate, you’d think they would bow in the face of bullish economic data, not soft. What’s more, the soft trade surplus data has resulted in diminished outcries from the US. I think this is evidence that Yuan appreciation will never have anything to do with US tantrums (which will never be as scary to Hu Jintao as having the wrath of all China bearing down on him, but that’s an article for another day).

But we can think of some other reasons that China might want to raise its currency!

More on the business cycle soon. I haven’t forgetten.