China Faces Pressure to Lift Yuan

NEW YORK (TheStreet) -- Mercantilism is alive and well in China.

According to a recent Currency Thoughts article, China is now the world's third largest economy, although well down the leader board in per-capita terms. Chinese monthly economic figures for exports, industrial production, and investment will be reported Wednesday.

A massive three-dimensional policy stimulus from low interest rates, deficit-fiscal spending and intervention to maintain a highly undervalued yuan has the Chinese economy quickly revving back to its pre-global downturn pace.

Re-pegged against the dollar since July 2008 at roughly 6.83, the yuan has followed the greenback southward in 2009 against almost all other world currencies. The last thing the global adjustment process needs is for the biggest surplus economy to have a depreciating currency.

China's rapid buildup of liquidity from this policy could fan future domestic inflation and makes an international monetary system that revolves around the dollar even more unstable.

Governments around the world have tried to reason with Beijing officials to become enlightened and let the yuan climb. Incremental competitive pressure on U.S. industries has actually been less severe than for Euro-land participants or China's neighbors such as South Korea.

President Obama visits the region next week and will try to cajole China to budge. He'll hear plenty of criticism in return about America's increasing predisposition to impose trade barriers, neglect the dollar, and exert no leadership in restarting multilateral trade negotiations. As for yuan policy, Chinese officials will do what they've always done: hear what they wish and disregard the rest.