Global Economy
Skyrocketing Oil Prices: A Blessing or a Curse for the Environment
Contrary to a common belief, the increase in the price of fuel is far from being a panacea for environmental pollution
The Unholy War
The global financial crisis triggered a conflict between the world’s major currencies that is fought with unconventional weapons, with what effects?
Which social impacts of the Eurozone crisis are you concerned about?
Education
Extracurriculars - When is Enough, Enough?
Secondary school and university students are taking on a variety of extracurricular activities to try to enhance their CVs, but how enriching is this behaviour?
It's My Language Too!
The majority of people speaking English today are not natives, should their use of language still be measured against the standards of the Queen’s English?
Main Content
China Finally Accepts an Appreciation of its Currency the Yuan. Why?
On 19 June 2010 China made a remarkable move just before the G20 summit in Toronto, Canada.
The Asian country finally accepted to revalue its currency through allowing a better flexibility of the Yuan exchange rate. Because of China’s economic performance, this so called “flexibility” will definitely lead to a significant appreciation of its currency. During the week following the Beijing announcement, the Yuan reached its highest value in five years.
Two main factors seem to be at play for the latest turn in Chinese monetary policy.
The first one is political. It is no coincidence that China made that decision just before the G20 summit in Canada where the topic was due to be discussed. With the appreciation action, China avoided a confrontation with all the Western powers and allowed the meeting to focus on the European sovereign debt crisis.
Both US and European representatives had indeed been putting pressure on China for months to make its leaders change their monetary policy. President Obama himself estimated recently that an undervalued Yuan was giving China “an unfair trade advantage” as it supported its exports and also reduced its imports (foreign products became very expensive because of the unfavourable exchange rate). Obama further pointed out that the undervalued Yuan limited trade competition and had a de facto protectionist effect. The Chinese government replied to Obama that the appreciation of the Yuan would not solve the Chinese trade surplus with the US, an issue which remains the main source of tension between the two countries.
The second factor behind China’s appreciation decision is economic. The country is currently facing inflationist tensions, which weaken its economy and the standard of living of its middle class. A stronger Yuan will make Chinese products less attractive abroad, but more popular domestically. This outcome combined with cheaper imports will encourage competition on the Chinese domestic market and will bring prices down. As a result, inflationist tensions should ease.
China is beginning to realise that its economy should not rely exclusively on exports and this is why the country is trying to adopt a new growth model. In the process of this paradigm shift, China hopes to develop its domestic market and encourage a weak consumption. In addition, the Chinese government is on the move to build a system of social protection that would encourage people to save less and consume more.
The decision to let the Yuan appreciate will also benefit the global economy. It should stimulate Chinese imports to rise, which will provide foreign firms with access to an enormous and underdeveloped market.
With its latest Yuan appreciation move China hopes to balance its economy, while encouraging global growth at the same time. The most significant consequence of the move, however, is China’s new willingness to respect the rules of the economic game.