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China-based sources have told Stratfor that a debate within China’s central government has intensified in recent months over whether the yuan’s value should be significantly ramped up in a one-off revaluation. Some reportedly are arguing that a one-off major revaluation will help China deal with rising energy costs and that without it, the country’s current pace of economic development cannot be sustained. Others reportedly are arguing against a major revaluation because any sudden jump in the value of the yuan could topple thousands of Chinese export businesses (and cost millions of jobs).
Broadly speaking, according to a source in the Shanghai Stock Exchange, the Ministry of Commerce is against any rapid revaluation, as it would hurt national exports; China’s central bank (the People’s Bank of China), which is reportedly more receptive to foreign ideas, is in favor of a quick revaluation as a swift remedy for stamping out inflation; and China’s Ministry of Finance, though traditionally conservative, has relatively little input into currency policymaking process.
In spite of the ongoing debate over the yuan, most Stratfor sources familiar with the issue think China will not stray from the gradual pace of appreciation that has been in effect since 2005, when the yuan was officially freed from its rigid peg. For salient economic and political reasons, we agree.
Ultimately, all Chinese economic decisions are political decisions. While Chinese government economic planners certainly have differing opinions about the use of a significant one-off yuan appreciation to fight rising inflation, such opinions do not determine the final decision. Some entities — like the People’s Bank of China, which handles the Chinese government’s transactions in the internal foreign exchange market — have input into the decision-making process, but they are not the ultimate decision-makers. The decision-makers with the real power sit within the Chinese State Council, to whom the central bank must submit all its recommendations for permission before they can be enacted.
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