Maybe if China was a developed country and an extremely open economy with massive influx of foreign imports, then an appreciation of the Yuan will do the Chinese people some good.
However, China is still a developing export based economy with heaps of domestic producers producing all sorts of goods and minimal foreign imports. China should not bow down to the western pressure. The westerners are merely threathened by the rise of China and ganging up to making a big hooha over this.
The issue at hand is - what is the actual value of the Yuan? What we know is that PPP is at 1.5 and at 6.5 today, it is clearly not at equilibrium.
Manufacturing in China is a very low margin business. Today, China is losing manufacturing to lower cost centers such as Bangladesh even as the Yuan strengthens gradually. A higher Yuan would mean lower import prices and lower energy costs which would benefit Chinese consumers while hurting the export sector but we see Chinese products moving up the value add chain so the exporters to suffer are of the lower quality end - eventually these exporters would close shop but China would prefer a gradual move here.
Clearly, the bright Chinese Economists themselves would prefer a stronger Yuan - for many reasons incuding hedging inflationary pressures. However, the problem is the Chinese Central Government and the 2012 succession issue. The currency is seen as a power play domestically and internationally so this is politics and not economics at work.
The Americans are due to label China a Currency Manipulator on Friday. My guess is they will postpone the contents of the bi-Annual currency report to give China some wiggle room. We are however surprised the Chinese have allowed recent daily bands to be revised so sharply so maybe the currency war is more cold than hot.
Singapore shocked the markets Thursday by tightening by allowing the S$ to appreciate when all other Asian economies are defending the strength of thier curriencies. This is surprising given exports account for 25% of our economy. Expect a very sharp contraction again next quarter.
