Assessing the Value of the Chinese Yuan

As the currency of the fastest growing economy in the world, the Chinese Yuan (RMB) is naturally a favorite topic of conversation and speculation among forex analysts and investors. None is more discussed than its value and when it will be allowed to float in the forex.

What is the Yuan's maximum potential? What is its genuine forex value? Will it replace the U.S. Dollar as the base and reserve currency of the world? Analyzing the prospects for the Yuan, be it short or long term, is difficult for its situation in the forex and financial markets is highly complex.

Right now, the currency is kept artificially low by the Chinese government. The Yuan is only allowed to float at a rate of 0.5%. Since 2004 the Chinese currency has been allowed to appreciate by only 3%.

Forex analysis of the real value of the Chinese Yuan varies from one study to another. Some estimates, based on statistical analysis, have it that the RMB is 50% undervalued; other technical analysis point to the fact that the average wages in China is still lagging compared to the United States, therefore if the Yuan is undervalued, it is only by a small percentage.

Nevertheless, there is a move in the United States Congress to pass a law that will impose a tariff on Chinese products. Doing so, from the American viewpoint, would address the undervalue problem and also help mange the U.S. trade deficit.

From the Chinese viewpoint it is unlikely that they will allow the Yuan to float in the forex for a number of reasons, chief among them is that such a move might seriously affect their burgeoning export industry. Already the controverswy surrounding the quality of Chinese made goods has led to more scrutiny and stiffer requirements.

Some forex analysts also point out that if the Yuan were to be devalued, it might hurt the U.S. and other leading consumers of Chinese export, as China might decide to invest in countries where the currencies are more competitive against the Yuan.

However, devaluation is not without pluses; it will help China increase its forex reserves more easily, and by allowing the Yuan to float, potentially have a more powerful position in the world financial markets.

All of these scenarios are just that, scenarios. For the forex trader, the best way to handle the situation is to simply hold on to his Yuan, and monitor the events closely. Regardless of the variations in the various analyses, the Yuan is still considered a good bet in the forex.