Posts Tagged ‘controlled float’

The rise of China and the Yuan

Monday, September 13th, 2010

Our strong belief is that China will take over the United States as the dominant power sometime this Century. This is becoming more apparent every day.

Note that in the image of the top of this blog, there is a Chinese woman holding some Renminbis. And you can also see on the left side of the same picture the exchange rate which was 7.31 when the photo was taken. China does not think like America, never did and probably never will. And a perfect example of that is their currencies.

Below is the exchange rate of the Chinese Yuan versus the US dollar for the past twenty years.


chinese-yuan

What is not always obvious when you read some recent newspapers articles talking about the Yuan moving in this or that direction is that for the most part the Yuan is not moving anymore with any significant degree. As they say one image reveals more than one thousand words. So let’s look at this graph.

First the chart makes it obvious that the Yuan has never been a freely floating currency, and it still is not. Whatever the official statements, the exchange rate is very much controlled by Beijing, with an iron hand in a velvet glove.

Long time ago, during the beginning of China’s modernization, the rate was at 5.50 (1992). The rate was even lower earlier (not on the plot). The Yuan was traditionally pegged at 2.46 fifty years ago, but it appreciated to a maximum rate of 1.50 in 1980.

As China opened up, they orchestrated a series of devaluations. The last one appears on the chart in 1994, when the Chinese made the last massive devaluation from 5.50 to 8.50. The rate then almost did not change for over ten years. Going from 1.50 to 8.50 gave a formidable competitive advantage for Chinese exports compared to other Asian or non-Asian nations, an advantage still felt today.

It is only at a much later time when the Han nation had achieved years after years of ten percent growth that they agreed to let the Yuan rise a bit, and it came back to about 6.7 in 2008. But from that point on, it has once more remained inside a tight range. As the picture clearly shows.

The red arrow leads to a zoom of the past 6 months range. So if you only see the range from that scale, it may seem that the exchange rate is moving. But indeed the recent movements are negligible.

The lessons to be learned. China differs from the USA for many reasons, two noteworthy are democracy and floating rates. So as China is rapidly dominating the world due to its economic success, it could very well be the case that the old democratic values from Europe may become vulnerable to a more controlled type of Government.