The uncertain fate of China’s currency
Internationalization of China’s currency – government had set itself a deadline of 2020 to make the yuan fully convertible – has been delayed as government scales back on some of its promised liberaliaations in order to maintain the value of its currency.
A sharp depreciation in the currency’s value would be bad news for consumption in China, but a successful unchaining of the current system (which prevents conversion) could radically revalue the yuan upwards –conservative estimates say China’s currency is undervalued by 20 percent.
Most likely outcome: A depreciation, if it does occur, would unleash Chinese spending overseas. But on the other hand, a liberalization of China’s currency regime could also produce a run on the yuan by global currency speculators and shorters, who believe China’s economy is overly indebted, to support the current value of its currency against the dollar. With so many factors at play, even the smartest economists in the world can’t predict the outcome of this reform with certainty.
