The Yuan Remains the Same

Asian stocks have been hit over the past three days amid fears that China might give in to pressure from the U.S. and revalue its currency. A revalued yuan would likely rally vs. the dollar, hurting the competitiveness of Chinese exports, thus diminishing that nation's economic growth and demand for its neighbors' wares.

It's not going to happen.

"There is negligible risk of a [yuan] revaluation anytime soon, if ever," Morgan Stanley analyst Stephen Jen wrote from Taiwan last week.

Since 1995, China has kept the exchange ratio of the Yuan pegged at around 8.3 to the dollar. If the ratio were set in the free market, the yuan would be widely expected to trade much stronger because China's fast-growing economy has attracted so much outside investment and its export surplus has risen eightfold since 1996.

American manufacturers, which say they're losing business in the U.S. and around the globe because of China's undervaluation, claim the yuan would gain 40% on the dollar in a free-floating environment.

But the Chinese have too many reasons to keep the peg, and they moved to quash the speculation Tuesday in an official statement.

"These rumors are groundless and are a misunderstanding of our country's current exchange rate policy," China's State Administration of Foreign Exchange said in a statement posted in Chinese on its Web site, Reuters reported. "It is impossible to make the unwise move of a one-off revaluation."

To some, including RealMoney.com contributor John Rutledge, such a denial is the last refuge of a country about to surrender and make a currency move, as has happened many times in the past. But in this case, that's a misreading of how China's government works, according to Jen.

China is using the undervalued currency to bolster its macroeconomic policies and has no interest in making anything but the most minimal changes, he observed.