With China’s prospective economic outlook and its appreciating currency, hot money will continue flowing into China.

China‘s comparatively quick economic growth still makes it one of the destinations for international speculators, although it’s stock market has become lusterless because of the global turbulence caused by American subprime crisis. Moreover, the central bank has taken several monetary measures, which has proved “effective”, to bring down the main stock index and stem the inflation. For example, raising the reserve requirement ratio 11 times and the benchmark interest rates 6 times since last year to absorb excess liquidity.

As the yuan is rising, it’s difficult for some enterprises to stay in the competitive market. If they wanted to survive in this competition, they had better upgrade their technology and strengthen their competitive power to lessen the impact of rising labor cost and possible energy pricing mechanism.

Even though many investors in China seemed to think the government would do whatever it could to keep stock prices high before the Olympics.

Popularity: 2% [?]

appreciation, China Yuan, competiton, inflation

The value of the Chinese yuan has been a sore spot in United States-China relations in recent years. The US, faced with a US$256.3 billion trade deficit with China for 2007, a threefold increase since 2000 ($83.8 billion), has called on Beijing to revalue its currency based on the presumption that it is set artificially low against the dollar – maybe by as much as 40%.

The popular perception of fear is also based in part on China’s success in becoming a global financial power. Over the past three decades, the Chinese leadership has pursued a modernization program largely built on traditional economic development models: heavy industrialization, labor- and capital-intensive manufacturing industries, export-led growth, low labor cost and high environmental damages.

As part of China’s development paradigm, Beijing is following a basic premise laid out by old school mercantilism on the accumulation of wealth: export as much as possible while discouraging imports where feasible, and the larger the trade surplus, the richer and stronger the state. This dogma has kept China’s currency value low for most of the past 30 years.

Rather than let the yuan’s exchange rate be decided by the market, the government set a fixed exchange rate by pegging the yuan to the US dollar. As long as GDP continues to grow by close to double digits every year, and exports expand further with a low currency value against the dollar, both central and local authorities can claim success.

A stronger yuan, will certainly have an impact on China’s export volumes, and potentially affect some manufacturing jobs. But the impact will be limited given the size of the Chinese economy. Furthermore, China’s imports will become cheaper, thus canceling out any negatives that may come from the reduced exports. Ultimately, such macro-level adjustment will make the Chinese economy much healthier and more competitive.

With the US and global economy in so much trouble, there are now opportunities for China to pour in much-needed Chinese capital around the world. Britain and Japan, for example, have expressed particular interests in CIC investment in their countries. The world today does not seem to long for any “currency wars”. Rather, it needs a well-managed process to bring down China’s trade surplus without creating a self-fulfilling prophecy, increase the value of the yuan with minimal negative impact and integrate China into the world financial system to create the “win-win” situation that it needs.

Popularity: 1% [?]

China Yuan