Tuesday, 6 March 2012

Dragonomics: 2012

Reverse Manipulation

There are two graphs I wish to show this afternoon, the above graph shows the gradual revaluation [appreciation] of the Chinese Yuan since 2005, when it was at 8.28 for a dollar. The second graph is from the FT yesterday showing the period from the beginning of 2010 when Beijing still maintained a solid post-crisis exchange rate peg:
Sticking to the Path
This graph shows the somewhat bumpy but preordained revaluation of the Yuan, as sections of the politburo have given way to suggestions by the reformist PBOC, the Chinese Central Bank, to gradually liberalise the economy.

Ultimately if China is to become a core component of the global economy, it is necessary for it to have sound financial institutions and independent bodies free from government control. This follows on from the World Bank report on China calling for significant reforms if China is to avoid the Middle Income Trap, the fate of many a historical rising economy; Li Keqiang, Beijing's prime ministerial successor for this decade, recently expressed enthusiasm for the report. Yesterday, I saw there was a front-piece cover analysis on the report in China Daily, the party's flagship English language newspaper. Despite this, as The Economist comments "China remains a big deal for the [World] bank, but the bank is not a big deal for China".

In light of the recent downgrade of [minimal] target GDP growth to 7.5% and PBOC's monetary worries of rising inflation, it is unlikely we will see further revaluations. The Yuan is going to settle at the 6.3-4 mark for the coming months. Especially in light of this year's political change at the top, any economic woes would be squashed to enable a smooth transition period. Governing China towards high-income status will resume from 2013 onwards.

Nevertheless as China liberalises its economy, capital controls it has had in place for decades would have to be loosened. In International Economics it is impossible to maintain monetary discretion, capital mobility and fixed exchange rate, even if you are set to become the world's largest economy.