Why China Probably Won't Revalue the Yuan Soon

Posted by: Bruce Einhorn on February 16, 2010

As China shows more signs of overheating, Goldman chief economist Jim O’Neil says Beijing is poised to allow an appreciation of its currency, the yuan, to slow the economy. As my Bloomberg colleagues reported on Monday, O’Neil thinks the Chinese could allow the yuan to strengthen by as much as 5%. “I have a strong opinion that they’re close to moving the exchange rate,” O’Neill said in a telephone interview from London after China’s central bank told lenders on Feb. 12 to set aside larger reserves. “Something’s brewing. It could happen anytime.”

While there are solid economic reasons to move quickly, there are also some solid political reasons to stay put. The U.S. has been loudly calling for the Chinese to let the yuan appreciate. For instance, President Obama said in an interview with Bloomberg BusinessWeek, “China and its currency policies are impeding the rebalancing [of the global economy] that’s necessary. My goal over the course of the next year is for China to recognize that it is also in their interest to allow their currency to appreciate because, frankly, they have got a potentially overheating economy.” (You can read the whole interview in the current issue of Bloomberg BusinessWeek.) The president is right, but China’s leaders are probably in no mood to give an inch to the U.S. right now. They’re still fuming over the arms sales to Taiwan, U.S. criticism of China’s Internet censorship and a meeting between Obama and the Dalai Lama that’s scheduled for Thursday. A change in currency policy now would be a big win for Obama – and might lead people in China and overseas to conclude that putting pressure on Beijing works. So even if a revaluation of the yuan is in China’s interest, it probably isn’t going to happen for a while.