More on the G7: Yuan Debate?

There will not be a statement after this weekend's G7 meeting, but officials will likely take to the microphones and wax on global developments and their pet issues. Host Canadian Fin Min Flaherty says that foreign exchange issues will be discussed, but this seems to be normally the case, especially given that central banks will be represented.

It was up to Japanese Fin Min Kan to provide a specifics. He said that the Chinese yuan may be debated. Really ? Debated ? If the affirmative case is something like, resolve that China allows its currency to appreciate, who is going to take the opposite side?

This is precisely the problem--there is no one to take the other side as China is not a member of the G7.

Indeed counter to the increased rhetoric of some European officials, since the financial crisis began either in July 07 or early 08, the yuan has actually appreciated against the euro.

To make the best case for the European officials, we chose as our starting point Aug 08 because by then the Chinese yuan had been effective repegged to the dollar. Since Aug 1, 2008, the euro has lost about 10.5% against the yuan and the British pound has lost nearly 19.5%. The Japanese yen is the only G10 currency to appreciate against the yuan since peg with the dollar was re-established.

We would also point out that since then--Aug 1, 2008--the yuan has also appreciated against most of the regional currencies as well--more than 12% against the Korean won, more than 8% against the Indian rupee, 4.3% against Malaysian ringgit, more than 4% against the Taiwanese dollar and the Philippine peso.

This is not to defend China's decision to re-peg its currency, but just to point out that since that decision, most other countries, excluding the US and Japan, have actually gained not lost currency competitiveness against China. There might not be any one at the G7 meeting who will oppose making a fetish out of the yuan exchange rate. Recall that in early 2005, prestigious economists argued that the given the bilateral US-China trade imbalance, the yuan would need to appreciate 20-25%. It proceeded to do precisely that over the next three years and at the end of 2008, China's trade surplus was even larger with the US.

There might be any one at the G7 meeting that will remind the attendees that what is ultimately at stake are growth, savings and investment patterns. Even if China were to dump all of its dollars, which it is not about to do, and adopt the euro or the SDR, it would still have a reserve problem.

Moreover, arguments that say China should do "x" because the world needs it are weak. Few, if any countries, pursue macro economic policy objective based on what is good for its neighbors. China is no exception. The point here is that at least since the crisis began or since China has re-pegged to the dollar, its actual competitive advantage does not appear to have been enhanced. There may be a discussion about the yuan at the G7 meeting and some individual officials may comment on it, but there probably won't be a debate.