Tuesday, April 6, 2010

Bought in China

The Economist in this week's issue discusses what it sees as a transformation in American buying habits. If its predictions are correct, that Americans will consume less and produce more for global markets, Chinese companies will no doubt experience some ripple effects. The Economist points out that currently strong American exporters are more likely to benefit from a lower dollar and increased consumption. So what changes can one predict in regards to Sino-US trade?

Data from the U.S. Census Bureau illustrates the decline in bilateral trade that has taken place up to this point in time. The trade imbalance for 2009 was similar to that in 2006, dropping from a high of $268 billion in 2008 to $226 billion. If the U.S. buys less and the Chinese buy more (assuming the Chinese central bank allows the Yuan to appreciate in value), then the gap could shrink even more.

This partly why some American politicians are calling on the Chinese government to allow their currency to gain in value. If the Yuan grows stronger against the dollar, Chinese exports are more expensive in the U.S., while American goods in China are cheaper. However, if the Yuan's value stagnates, then the American deficit with China will only decrease as a result of lower American consumption of Chinese goods.

There are some academics who think that China will relax its hold on the RMB and allow it to gain in value. While such predictions may pan out, I'm fairly certain that the Chinese will not allow their currency to appreciate as much as American politicians and others in the international community would like. The general consensus is that the RMB is undervalued by 25%. I'll venture to say that the Chinese central bank will allow 5%-10% over the course of the next year. Again, no where near where people would like, but it's a start.

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