A close examination of the mis-valuation of the yuan across a number of models gives a wide range of numbers. Models have some values that say it is close to fair value and others which state the undervaluation is closer to forty percent.
These differences are based on the type of model used or the data employed. For example, PPP estimates may differ based on what is the price index used. There can be strong cases that the undervaluation is above 20%. We prefer BEER/FEER models which show less undervaluation than PPP but there is still room for appreciation.
The undervaluation does not change even with the news that the trade deficit turned negative in March. What is clear is that the central bank would not have to buy dollars and increase reserves if the currency was fair valued.
A breakdown of the trade numbers shows a more complex exchange rate story. There is a trade surplus with the US and Europe but a trade deficit with the other parts of the world. Hence, the story concerning the impact of a change in yuan is more complex than what is seen on the surface.
With the strong growth numbers, there is more room for an appreciation. without hurting domestic growth. An appreciation will also release some of the price pressure in the Chinese economy. Real GDP was up 11.9% for the first quarter, retail sales increased 18% and industrial production increased 18.1 percent.
The issue has now become more political than economic. Still h direction toward a rising yuan is still in place.
These differences are based on the type of model used or the data employed. For example, PPP estimates may differ based on what is the price index used. There can be strong cases that the undervaluation is above 20%. We prefer BEER/FEER models which show less undervaluation than PPP but there is still room for appreciation.
The undervaluation does not change even with the news that the trade deficit turned negative in March. What is clear is that the central bank would not have to buy dollars and increase reserves if the currency was fair valued.
A breakdown of the trade numbers shows a more complex exchange rate story. There is a trade surplus with the US and Europe but a trade deficit with the other parts of the world. Hence, the story concerning the impact of a change in yuan is more complex than what is seen on the surface.
With the strong growth numbers, there is more room for an appreciation. without hurting domestic growth. An appreciation will also release some of the price pressure in the Chinese economy. Real GDP was up 11.9% for the first quarter, retail sales increased 18% and industrial production increased 18.1 percent.
The issue has now become more political than economic. Still h direction toward a rising yuan is still in place.
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