Ask an Economist: How Much is the Yuan Overvalued?

Alejandro Nadal

Triple Crisis Blog has invited readers’ questions in advance of the April 24-25 IMF/World Bank meetings in Washingon. A reader asked:

Q: There has been a lot of discussion recently about the over-valuation of the Chinese currency. How do we know how much it is overvalued? What would the implications be for US and Chinese workers if the government were to decide to devalue it?

NADAL: There is a debate on whether the Chinese yuan is over or undervaluated. The American Manufacturing Association sets the undervaluation of the yuan at 40%. But the Federal Reserve argues that the yuan appreciated 16% between June 2008 and February 2009. According to the Bank of International Settlements (BIS) in Basle the yuan appreciated between February 2007 and January 2010 the yuan appreciated by 10.7% while the US dollar lost 8% of its value.

This, in fact, is part of a strategy to correct the huge US trade deficit.  Does this mean the US, not China, is the currency manipulator? Not necessarily, this depends on several parameters (degree of undervaluation plus duration). On the other hand, the appreciation of the yuan would cause greater inflationary pressure in the US, and this could precipitate an increase in interest rates and further endanger the fragile economic recovery.

In the final analysis, China’s trade surplus owes much more to its very low wage costs, but since this is too close to the mantra of “comparative advantages”, it is easier to criticize Beijing on the grounds of being a currency manipulator.

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