China: A tale of three swan songs
This post is a guest contribution by Dian Chu, market analyst, trader and author of the Economic Forecasts and Opinions blog.
The United States, the European Union and others have long been critical of China’s renminbi / yuan regime. Many U.S. lawmakers complain China’s currency is undervalued by as much as 40% and undercutting the competitiveness of U.S. products.
Internationally, China is under growing pressure − especially from the United States − to appreciate the value of the yuan. Chinese leaders contend that the yuan’s role in trade balance is limited, and have asked nations to loosen the restriction on the import of products instead.
Two diverging Swan diagrams
This yuan-induced heated debate prompted two prominent economists to reference the age-old Swan diagram. However, each came up with a different position for China. The Swan diagram is generally used to represent the situation of a country with a currency peg. The concept was developed by Trevor Swan in 1955.
The two diverging swan images are also reflective of the clashing views regarding currency between China and the U.S. In this case, beauty is really in the eye of the beholder. While both economists agree that China’s currency is undervalued, they differ on the approach of the issue.
Krugman (The U.S.) – Bow or tariff!
Paul Krugman’s NY Time blog, dated March 11th, made a case for China being “clearly in the lower zone: a trade surplus at levels that are raising international tension, plus inflation.†(Diagram 1)
By Prieur du Plessis on 03/26/2010 – 4:48 am PST -- Market Outlook