Strong yuan apppreciation

The yuan (CNY) has seen a nice appreciation in the last two days to 6.3937. This is the strongest level since the dollar peg was eliminated last June. This could be good news for the rest of the world since stronger yuan may lead to an increase Chinese imports and a decrease in Chinese exports.This is the policy that much of the world has been asking for from China.

Nevertheless, the relationship between trade and currency changes is complex and there have been strong arguments that the for China a increase in the yuan may not decease the trade surplus and may not lead to higher export prices. Certainly having free exchange rates is an improvement over a tight peg but the rest of the world may not get what they want. One effect is that inflation may be reduced if the yuan appreciates. The world also needs to see more Chinese domestic growth that will help the rest of the world and there is one simple way to get it if there is increased consumer demand for imports and not just increased inputs to export production.

The change may not be a direct policy response but may be caused by the Chinese to be less willing to buy US debt asset. There is no dollar demand to keep the yuan from appreciating.