The Wall Street Journal’s Asia edition featured an interesting editorial today from Peterson Institute fellow Daniel Rosen.  In nutshell, Rosen suggested that China may finally need to revalue its currency, the Yuan, simply because pegging it to the dollar has become too expensive.

Why might this be?

  An undervalued Yuan has made Chinese exports particularly cheap for U.S. consumers.  However, the dollar has been in freefall of late, taking the Yuan with it.  And so, a falling Yuan has made goods more and more expensive for Chinese importers.

Essentially, you get what you pay for.  Or, conversely, you can’t get what you don’t pay for.  As Rosen noted, “many [Chinese] importers are suffering from soaring commodity prices,” but more significantly, oil prices are hammering them, too.

Rosen points out that if China had not slightly budged its currency from a pre-July 2005 rate of 8.27 to the dollar, the cost of imported oil in the first four months of 2008 alone would have been an additional $7 billion dollars.  Looked at another way, the more the Yuan moves away from the dollar, the more money China could save on oil imports.

While Chinese exporters have benefited from a cheap Yuan, it’s possible that the rising toll on importers may soon override all other concerns.  At that point, Beijing could be forced to abandon its currency peg in order to afford the now frighteningly expensive barrels of oil.

It remains to be seen if such concerns will affect China’s thinking when it sits down for bilateral talks in Annapolis next week.  But it’s an interesting scenario.
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This entry was posted on Thursday, June 12th, 2008 at 5:55 pm and is filed under Currency Manipulation. You can follow any responses to this entry through the RSS 2.0 feed. You can leave a response, or trackback from your own site.