US focus on yuan's value ignores China's experiments
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Chinese monetary policy has become one of the most hotly debated issues arising from the country's phenomenal economic development.
The country's economy is doubling in size every decade, and with this comes enormous change to its composition and alignment. Chinese monetary policy must evolve and adapt to reflect these changes, and that yuan reform is a central aspect of continued economic development.
One school of thought, particularly popular in the US, is that China should undertake a rapid currency revaluation to help rebalance the global economy.
It is hard to find any sound economic logic in this argument. Such a move would not only damage China's economy, but would have detrimental effects across the globe by throttling one of the key motors of post-crisis economic growth.
Given that many of the US economic woes stem from structural deficiencies in the domestic economy, the value of the yuan is anything but the "magic bullet" that some US commentators would have us believe. This fixation with the yuan's valuation also ignores that, when it comes to managing a currency, there is more than one way to skin a cat.
Over the past few years, we have seen the Chinese government employ a variety of these measures to develop the yuan into a more liquid, globally integrated currency. Since 2007, the yuan has steadily appreciated against the dollar and other major currencies. This has been achieved by varying the "crawling peg" by which it operates, as well as the continuing real-terms increase in the value of China's economy.
A second mechanism was put into play last month, when the People's Bank of China increased interest rates by 0.25 percentage points, the first such adjustment in three years. The move is part of ongoing efforts to ease inflation, but an auxiliary effect is that it is likely to give further impetus to the yuan's steady appreciation.
A third area of noteworthy reforms has been increasing experimentation with cross-border yuan transactions. These have taken the form of allowing yuan-denominated payments with selected key trading partners in Asia and South America.
In Hong Kong, for example, the volume and frequency of cross-border yuan transactions has increased markedly, and it is now possible to buy yuan-denominated bonds, known as "dim sum bonds," on the Special Autonomous Region's stock markets.
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