Chinese Yuan at Record High vs. Greenback

The Chinese yuan rose to its highest level against the dollar since the modern currency began trading in 1994. At its high point today, one U.S. dollar could buy 6.2838 yuan. A year ago a dollar fetched about 6.4 yuan. In late 2007, the exchange rate was around 7.4 yuan to the dollar.

That amounts to an appreciation of the Chinese currency by about 15% in the last five years. That's about half the appreciation that many economists thought should occur. The undervalued yuan has been a source of irritation and harsh words from the U.S. and other developed nations as the Chinese have been accused of manipulating the currency to keep its value low to foster the country's manufacturing-for-export economy.

But the new round of easing announced by the Federal Reserve has weakened the dollar yet again, and although China's economy is not growing at double-digit rates any more, it's still growing by more than 7.5% annually.

That growth rate is strong enough to attract investors, particularly in short-term bonds. The yield on a one-year Chinese government bond is 2.82% according to The Wall Street Journal, compared with a one-year Treasury yield of 0.16%.

A further rise in the yuan's value could be tempered by additional stimulus by the Chinese government to get GDP growth on a faster track. The effect, as with the Fed's stimulus, will be to weaken the yuan somewhat, or at least slow its appreciation.

Paul Ausick

Filed under: 24/7 Wall St. Wire, China, Currency, Economy