In a recent WSJ op-ed Chinese ‘Currency Manipulation’ Is Not the Problem (Jan. 8), Edward Lazear concluded that the valuation of the Chinese yuan (CNY) is irrelevant for trade. This is highly mistaken.
Lazear correctly noted that the Chinese trade surplus mushroomed during the period 1995 to 2005, when the CNY was pegged.
However, the analysis misses the fact that the CNY was actually undervalued at the start of the period referenced. A whopping 60 cents was needed to purchase one yuan in 1980. By 1995, the currency had fallen to a scant 12 cents. Based on our calculations of currency valuations across a universe of 49 exchange rates, no currency was as undervalued as the yuan in 1995. So, even if the price of a product or currency increases over time, smart consumers will still buy if the product is still cheap.
In recent years, the People’s Bank of China (PBOC) and National Development and Reform Commission (NDRC) have introduced greater flexibility into CNY trading. This has helped reduce the trade surplus from a peak of $300 billion in 2008 as well as promote a shift from exports to domestic consumption as drivers of demand.