October 8th, 2010
08:15 AM GMT
Hong Kong, China (CNN) – Chinese Premier Wen Jiabao said in Europe this week that a free-floating yuan would be “a disaster for the world.”
He noted that Chinese export companies have small profit margins and could be hit hard, setting off a potential wave of social turmoil.
Yet a report by Mark Williams, a senior China economist at Capital Economics, on Thursday noted that export margins of Chinese companies did not fall when the yuan loosened its peg to the dollar from 2005 to 2008. The yuan increased in value against the U.S. dollar nearly 20 percent during that period.
In fact, “because most firms were able to raise either prices or productivity, margins did not fall at all” when the yuan rose against the dollar. The price of low-end exports rose, but so did Chinese firms’ market share.
The Chinese government is expected to focus on rebalancing its economy away from exports at its policy meeting next week. Economists at Goldman Sachs and JPMorgan expect they will look for ways to boost domestic consumption and investment and wean China off exports as demand for Chinese goods globally slows down.
That may be good news for China’s trading partners in the long run. But at the IMF meetings this weekend and the G20 summit next month, China’s currency policy is clearly going to remain a controversial topic.
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