x Abu Dhabi, UAESaturday 22 July 2017

Yuan bulls loose in China shop

For the leader of the world's largest economy, the US President Barack Obama may seem strangely obsessed with the currency of the world's third-largest.

For the leader of the world's largest economy, the US President Barack Obama may seem strangely obsessed with the currency of the world's third-largest. China's yuan, the White House has made clear, should be stronger. The US is not the only one saying so. A growing list of economists and world leaders are calling for China to allow its currency to rise against the US dollar, to aid global economic recovery and reduce imbalances in investment and trade that contributed to the crisis.

Normally when a nation runs a trade surplus with another, as China does with the US, the value of its currency rises as its exporters cash in dollars used to buy their products. Ideally, the yuan should rise until Chinese products become more expensive and US products less so, shifting demand until the trade imbalance is righted. China has been following a policy perfected by Japan and copied by exporters around Asia and the Gulf by keeping its currency from rising. The central bank buys incoming dollars so that the deluge does not push up the yuan. China's goods remain affordable to Americans and the trade gap continues to swell.

In the process, though, China accumulates US dollar reserves: more than US$2 trillion (Dh7.34tn) so far. It then invests these reserves in the safest, most abundant dollar assets it can find: US government bonds. China is now the US government's largest lender. With so much of its savings in dollars, allowing the yuan to rise stands not only to make China's exports pricier, but to reduce the value of its US dollar investments.

China has therefore called for replacing the dollar as the dominant currency of trade, but in the meantime it wants a stronger dollar. US officials pledge support for a strong dollar, but need a weaker one to stimulate exports and growth. China may find that if it wants to help its biggest customer, it may have to let it go. @Email:warnold@thenational.ae Obama reaches out, b10