Why Doesn’t the Yuan Trade Like Other Currencies?

BY busadmin  April 17, 2009 at 3:51 PM EST

yuan; booleansplit via Flickr

Question: Why don’t we let the yuan trade like other currencies? Even now, the yuan has an 20 percent or higher edge on other currencies because of the existing rules.

Paul Solman: Now, now, Maya, as my dad used to say, ‘hold your horses.’ That is, restrain yourself.

First of all, who’s ‘we’? The U.S. doesn’t restrain the Chinese currency from trading on the open market. The Chinese do. In fact, the U.S. keeps pressuring the Chinese to let the yuan (renminbi) trade like other currencies. (“Renminbi” means “people’s money,” by the way.)

Second, how do you know the Chinese currency has a 20 percent edge on others? I know it’s a number that’s commonly tossed around, but in China these days, the reports are that millions of workers are returning to from the cities to the countryside for lack of work because China is an export-built economy, and world trade has collapsed. That means far far less demand for Chinese currency with which to buy Chinese goods. Less demand for anything lowers its price, all else equal.

So is China’s currency really worth what it was even a few months ago? I doubt it. But remember my usual disclaimer, repeated here within the past few weeks: There are two kinds of economists…those who don’t know the future, and those who don’t know they don’t know.