Saturday, July 22, 2006

Will the Yuan Appreciate ?

The US has long been frustrated by Chinas currency being artificially maintained at below the actual market value, and has been pressurising Beijing to revalue its currency , efforts that have borne little so far given the Yuan has appreciated by a mare 1.4% in the last one year.

Although the Chinese currency is traded over the counter but the Chinese govt, through its market interventions, makes sure the Yuan trades at the desired value. An undervalued Yuan makes Chinese exports cheaper thus helping the export driven Chinese economy.

As per recent reports the Chinese economy is currently growing at 10-11% per annum, on the back of a huge trade surplus. The flooding cash ends up being used for landings by the banks. Left unchecked this could lead to excess capacity and bankruptcies that could snowball into a financial crisis.

The Chinese govt has finally taken steps to prevent overheating of the economy by controlling the money supply in the economy by increasing reserve requirements for banks, and allowing its banks to invest overseas. The lending rates have also been revised upwards recently , all signaling an effort to slowdown the economy. An appreciating Yuan could be next….

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