From: The ECONOMIST
Economics - free exchange
Dec 7th 2011, 11:29 by R.A. | LONDON
BACK in July, a souped-up version of The Economist's Big Mac index indicated that China's currency actually seemed to be near its fair value. That didn't prevent politicians in America and elsewhere from keeping the pressure on China to allow its currency to appreciate faster, even as Chinese labour costs grew rapidly. In October, America's Senate passed a bill that would require the government to consider currency manipulation in judging the fairness of import prices: a step calculated to make it easier to levy tariffs on Chinese goods.
The world has become a much different place since this summer, however. Emerging-market growth is quickly flipping from red hot to worrisomely flat. Chinese factory activity is declining, according to the latest measures, while India's growth is disappointing and Brazil's has vanished, as of the third quarter. At the same time, financial troubles in Europe are contributing to capital outflows from large emerging markets and corresponding declines in currency values.
One might have expected China to dodge these pressures. The yuan has long been deemed undervalued while other emerging markets fretted about the overvaluation of their currencies. China has long run a current account surplus, suggesting that upward adjustment of the exchange rate is necessary, and has enjoyed corresponding reserve growth. And China's capital markets are tightly controlled, making rapid inflows and outflows of capital impossible.
Yet, there are nonetheless signs of an interesting reversal for the yuan. As Josh Noble points out, the yuan has been butting up against the lower edge of its daily trading window. It appears that China may be intervening to support the currency; Chinese reserves have been falling in recent months.
These trends may not trouble China's authorities too much. Inflation may become less of a threat as the global economy slows, reducing the government's need to use the exchange rate as an instrument of policy tightening. And with growth now a key concern, a drop in the value of China's currency is sure to be a welcome boost for exporters facing an ugly 2012 in key export markets, most notably Europe. In any case, I suspect the news will manage to appeal to both China bashers and China sceptics.