China Frees Up Yuan (a Little)

Filed in archive Yuan Renminbi on May 19, 2007

Somewhere in your home you have something that was made in China. Maybe it's your television. Maybe it's your dinnerware or your coffee maker. Maybe it's a part on the car in your garage. But you have something...

Whatever it is that you have that was made in China, probably you bought it because it was inexpensive. Why did it cost less? There are two main reasons, two advantages that China has in the production and export of goods. The first is that China's workforce gets paid far less than similar workers in countries like Australia, Germany, Britain and the U.S. The second main reason is that the Yuan Renminbi, China's official currency, is undervalued - many would say vastly undervalued.

There's a good chance that you appreciate the fact that your made-in-China television was inexpensive -- unless you make televisions for a living. And there the problem lies.

Since 1978 when the People's Republic of China began moving toward a market-oriented economy, major international corporations and small investors alike have been moving their production jobs from countries like the ones I mentioned in the last paragraph (Australia, Germany, Britain and the U.S) to China. That bargain priced coffee maker you have that has "Made in China" stamped on the bottom of it results in jobs moving from your country to China.

One of China's two economic advantages may be changing. On Friday the People's Bank of China (PBOC) announced that it would allow the Yuan to float more freely. Previously the Yuan was allowed to change in value by up to 0.3% in a single trading day. That margin has been widened to 0.5% in a day. It's not much. Most Western governments are not satisfied with the change and see it as just a symbolic concession. A year ago, on May 19, 2006 the U.S. Dollar was worth 8.0175 Yuan. Friday the Dollar was worth 7.6636 Yuan. That change makes the Yuan about 5% stronger than it was a year.

Will the value of the Yuan change more quickly now? Probably. Will it still be undervalued and provide China (and investors in China) with an economic advantage over other countries? For years to come unless more radical change takes place.

Investors in China can take comfort in that fact...