Yuan Under Seven: A Milestone?

Filed in archive Yuan Renminbi on April 15, 2008

You could have easily missed it. If it weren't for the credit crunch and Bear Stearns going under and all the US election hooplah in the news and the screech of the wheels on the US economy grinding to a halt, you probably would have heard more about it. The Chinese yuan renminbi hit a milestone last week when it traded under seven RMB to the US dollar for a while.

The dollar used to be worth something. Just three short years ago you could walk into a bank with an American dollar in your hand and come out with the 8.3 yuan you'd bought with it. Six months ago you could still buy 7.5 yuan with your dollar. But last week, at least for most of a day, you couldn't even buy seven yuan with your dollar anymore...

The IMF is pointing out what everyone else already knew about the rising yuan. China needs to fight inflation and a rising yuan does just that, making imported goods cheaper in China.

But is the stronger yuan having much impact on the US economy?






Until July of 2005 the Chinese currency was pegged to the US dollar. Now the yuan is allowed to change against the dollar within a relatively narrow margin, but that margin was increased recently. It took the yuan 18 months to move from 8 yuan to the dollar up to 7.5 yuan to the dollar. It moved from 7.5 to the current 7 yuan to the dollar in about six months.

Of course, everyone knows that the US dollar is in the dumps and getting weaker. A recent China Post article puts the yuan's rise in perspective by pointing out that over the last three years the Taiwan dollar is up 5.5% against the US dollar, the Korean won is up about 6%, the Indian rupee is up about 9%, the Japanese yen is up almost 12% and China's yuan is up about 18% against the US dollar. (The Philippine peso is up 34% against the dollar.) Traders are betting on the yuan going to 6.3 by this time next year, the Post says.

Many US policy makes hoped that a stronger yuan would slow exports from China. Most recent numbers show that the US trade deficit with China is declining - for the first time in three years. But China's exports still increased by more than 21% in the first quarter of this year. And the higher costs of Chinese goods here in America adds to inflation pressures during the Bush recession.

Be careful what you wish for...