China and US Tensions increasing on Currency Valuation

The US Senate and President Obama have been increasing pressure on the Chinese Government to revalue the yuan and let it move towards a market determined rate.China’s yuan peg to the dollar has been one of the main factors around which the debate of global imbalances has revolved.President Obama has already called for Exports to lead the US economy back into the growth track but that seems quite difficult with European growth slowing down and Yuan undervalued against the Dollar.

China says hands off yuan; Obama talks tough – Economic Times

China told the rest of the world on Friday not to meddle with the way it manages the yuan, setting the stage for a clash with its biggest trading partners at next week’s G20 summit. US President Barack Obama released a letter to his Group of 20 colleagues that zeroed in on prickly policy differences over China’s currency stance and debt-wary Europe’s rush to rein in bulging budget deficits. World leaders gathering in Toronto next week are struggling to maintain the crisis-forged unity that has been credited with preventing another Great Depression. Now that the global economy is on the mend, divisions are beginning to show.

Greek Contagion adds to Chinese Problems

The Greek Contagion has further excarbated the problem as the onus of growth again likes with US and China as Europe sees slowing demand.The weakening of the Euro against the yuan and wage rise is already a major headache for the export dependent Chinese economy.An appreciation of the yuan against the dollar could lead to a hard landing as the Chinese Economy might be slowing down already

Will China “Devalue” Yuan against the Dollar?

The Euro’s rapid 15% decline against the Euro has had an important side effect against the Yuan which is pegged to the dollar.While currencies around the world are depreciating against the dollar due to “safe haven” trade,the yuan remains immune,due to its peg to the dollar.Europe is China’s biggest export market throwing a number of its companies in peril due to the Greek Contagion . A 15% movement in currency makes it very difficult for a company to adjust particularly if it is running on paper thin margins.A Chinese company with 10% margins which exports solely to Europe has the potential to go bankrupt if the situation sustains for a long time.

China seeks to defuse Pressure through a Central Bank Statement

China’s Central Bank has sought to defuse the huge pressure being built up on China to appreciate its currency.In a statement,the Bank  it talks about “reforming the currency”.There is no hard numbers about appreciation or the timeline of the reforms.It goes on to generally ramble about yuan appreciating by 21% against the dollar and world economy improving and the need for BOP stability etc. etc.The Statement released by the Chinese Bank is quite vague and listed below

China Central Bank Statement on Yuan Exchange Rate – Bloomberg

China’s currency, the renminbi (RMB), or yuan, has been held about 6.83 per dollar since July 2008 after the government allowed a 21 percent appreciation over the prior three years.Further Reform the RMB Exchange Rate Regime and Enhance the RMB Exchange Rate Flexibility In view of the recent economic situation and financial market developments at home and abroad, and the balance of payments (BOP) situation in China, the People’s Bank of China has decided to proceed further with reform of the RMB exchange rate regime and to enhance the RMB exchange rate flexibility.

Starting from July 21, 2005, China has moved into a managed floating exchange rate regime based on market supply and demand with reference to a basket of currencies. Since then, the reform of the RMB exchange rate regime has been making steady progress, producing the anticipated results and playing a positive role.When the current round of international financial crisis was at its worst, the exchange rate of a number of sovereign currencies to the U.S. dollar depreciated by varying margins. The stability of the RMB exchange rate has played an important role in mitigating the crisis´ impact, contributing significantly to Asian and global recovery, and demonstrating China’s efforts in promoting global rebalancing.The global economy is gradually recovering. The recovery and upturn of the Chinese economy has become more solid with the enhanced economic stability. It is desirable to proceed further with reform of the RMB exchange rate regime and increase the RMB exchange rate flexibility.In further proceeding with reform of the RMB exchange rate regime, continued emphasis would be placed to reflecting market supply and demand with reference to a basket of currencies. The exchange rate floating bands will remain the same as previously announced in the inter-bank foreign exchange market.

US and IMF rush to congratulate China on releasing this “statement”

The US administration has been very restrained in raising the ante with China on the currency issue unlike the US Senate.Most of the talk has been very subtle and soft.So it comes as no surprise that both Obama and Giethner have rushed to congatulate China on this statment.However it would surprise me,if China appreciated its currency too fast or  too much given the tough situation it finds itself it.Even the IMF has welcomed this statement

Obama says China’s yuan move a “constructive” step – Yahoo

President Barack Obama on Saturday welcomed China’s announcement that it would resume exchange rate reform to make its yuan currency more flexible.”China’s decision to increase the flexibility of its exchange rate is a constructive step that can help safeguard the recovery and contribute to a more balanced global economy,” Obama said in a statement.Beijing said earlier that in light of the gradual recovery in the global economy, and as the recovery and upturn in the Chinese economy has become more solid, it wanted to proceed with currency reform and to make the yuan more flexible.The decision came a day after Obama gave China a clear prod by extolling the benefits of market-determined exchange rates in a letter to G20 leaders before their summit in Canada on June 26-27.

IMF chief welcomes more yuan flexibility – Economic Times

The head of the IMF, Dominique Strauss-Kahn, on Saturday welcomed China’s announcement to make the yuan more flexible, saying it will boost Chinese household incomes and domestic investment. In a statement, Strauss-Kahn said a stronger yuan was in line with findings of a mutual assessment report being presented by the IMF at the Group of 20 leaders’ summit in Toronto next week.