The Economist reports:
IN 2005 two American senators introduced a bill into Congress that threatened to slap a tariff of 27.5% on all Chinese imports unless the yuan was revalued by the same amount (their estimate of how much the currency was undervalued). That legislation was dropped, but several other China-bashing bills are still working their way through Congress and accusations about “unfair” Chinese competition will surely play a big role in this year's presidential election. Many American politicians and economists talk as if the yuan was still fixed against the dollar. Yet on current trends, by the time the next president enters the White House the yuan could be within spitting distance of the magic figure demanded in 2005.
Since the beginning of October the yuan has climbed at an annual rate of 13% against the dollar—its fastest pace since China stopped pegging to the dollar in July 2005 .... Since 2005 it has appreciated by a total of 14%. The offshore forward market is pricing in another 8% increase over the next 12 months; several economists are betting on a rise of 10% or more.
So does this mean the U.S.-China currency dispute is close to being over? Probably not, they say:
The yuan's rise is unlikely to silence flag-waving American Congressmen or economists. The slide in the dollar since 2005 means the yuan has risen by only 5% in trade-weighted terms, according to the Bank for International Settlements. China's current-account surplus has risen from 4% of GDP in 2004 to 11% last year, so any gauge that defines the equilibrium exchange rate as the rate that would eliminate the surplus would suggest the yuan is now even more undervalued. In 2005 Morris Goldstein and Nicholas Lardy at the Peterson Institute for International Economics estimated the yuan was 20-25% undervalued. By late 2007 they thought it was at least 30-40% undervalued despite its gain over the previous two years.
More at the link.
