The holiday week continues to limit information and policy-making, and of course the Chinese stock markets are closed, but there were nonetheless two interesting articles, one in the Chinese press and one from abroad, worth noting.  The first was a very long article in today’s Xinhua called “The rise of the yuan – where now for China’s currency?” in which the author, Zhu Yifan interviewed a number of economists on prospects for the RMB.

After going through the benefits a rising RMB has had for Chinese consumers and the costs to exporters, the article shifts gears and refers to the currency regime as a structural part of China’s problem:

The reverberations of the rapid appreciation of the yuan are deep and complicated. The change was not as simple as a boost in buying power or a squeezed trade surplus. Behind it lies a shift in the country's overall economic strategy, driven by recognition that the current export structure won't support economic development the way it used to.

“China's currency had been kept in an undervalued state since the 1997 Asian Financial Crisis, and the government in effect used it to finance the imports and exports sector at the cost of its non-trading industries,” says Professor Pan Yingli, of the Shanghai Jiao Tong University management school.  A large profit margin was then created between low production costs paid in undervalued yuan, and the high revenues reaped by selling these products to international clients.

This brought prosperity for the country, but took a heavy toll with high pollution and energy consumption. Too much labor-intensive industry with low-efficiency and little added value stretched supply by demanding evermore manufacturing materials, which pushed up upstream prices.