The Chinese yuan, along with the related ETF, hasn’t shifted much because of the country’s staunch approach to monetary management. However, external and internal factors may soon change that.
President Barack Obama and Dominique Strauss-Kahn, managing director of the International Monetary Fund, both told Chinese officials that letting the yuan appreciate would help the global economy. Chinese President Hu Jintao and other Chinese officials and economists, however, continue to defend the country’s current currency policy, reports Andrew Batson for The Wall Street Journal.
With exports for the year down about 20% and many manufacturers closed, China is loath to let the yuan appreciate because it would make exports more expensive overseas. Currently, the Chinese economy is recovering at the expense of European and Asian competitors since the U.S. dollar, along with the pegged yuan, is falling. Most private analysts don’t see any changes to China’s policy with the yuan anytime soon.
Strauss-Kahn has stated that China needs to “look more forward to investment and to long-term stability.” A stronger currency would help a Chinese household’s purchasing power, which would support economic growth from within the country.
Not everyone agrees. World Bank Chief Economist and former Chinese government adviser Justin Yifu Lin argues that a stronger yuan could hamper China’s export sector and possibly China’s entire economy, which would have a negative affect on global growth.
According to WisdomTree, there are several factors that favor an appreciating yuan relative to the dollar in years to come:
- Long-term economic growth potential.
- Emerging role as an economic leader in the world arena.
- Diversification away from the dollar by arranging trade agreements using the yuan with other countries.
- A gradual transition from an economic model focused on exports to one focused on domestic consumption.
- Rising yuan valuation as China develops even further. Emerging market currencies are often valued at a discount to long-term purchasing power because of risks associated with emerging markets.
- WisdomTree Dreyfus Chinese Yuan Fund ETF (NYSEArca: CYB): up 1.8% year-to-date; expense ratio is 0.45%
Max Chen contributed to this article.