Despite all the rhetoric between China and the U.S. right now, let’s not forget that China will surely hike its yuan-dollar rate. It’s a just matter of when, not if.
If they aren’t planning to do it, then why is the Ministry of Finance (MoF) and Ministry of Commerce (MoC) studying the effects of a yuan hike right now? A report is to be released by the MoC on April 27th. So we’d say don’t expect anything to happen until they’ve actually figured out what would happen.
In addition, the government has already hiked the yuan in the past and appears pretty aware that its fixed peg isn’t sustainable in the long-term. Even recently, Wen Jiabao explained that future flexibility was still in the cards, despite presenting a sharp rebuke of America’s escalating yuan criticism.
Which exposes the heart of the problem….
While a hike is coming and in everybody’s long-term interest, don’t expect it to happen while the U.S. is demanding it. By making a political show out of the issue, the U.S. is only delaying the realisation of any adjustment.
That’s because any hike would destroy droves of Chinese exporters who live on razor-thin margins and it would put a lot of Chinese out of work. Trying explaining that to the Chinese public if they think the hike was done as a gift to the U.S..
So while a hike must be done, and some degree of near-term damage to Chinese exporters and employment is unavoidable, China needs to carefully and patiently ascertain whether or not its emerging economic and political system can withstand the shock.
It’s a big deal to hike the yuan arbitrarily. China is a huge economy with billions of moving parts, all running at freight-train speed. You don’t just unscrew one of the engine’s bolts and then hope for the best.
Once they’ve made the hike, there’s no going back.
China and the entire world will be forced to live with the consequences, and if China accidentally torpedoes its economic and social stability by ‘doing the right thing’, it won’t be in anybody’s economic interest, not even the U.S..
So we should all stop freaking out and making the problem worse.
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