U.S. Trade Deficit Monitor: Truly Alarming

There was an interesting article in a Chinese newspaper, called The Standard, on Tuesday. The newspaper quoted Mr. Yu Yongding, who is a member of the monetary policy advisory committee to the People's Bank of China, as saying that China should weaken the link between the yuan (renminbi) and the US dollar, to make the exchange rate more flexible and improve the government's ability to manage the economy. Yu suggested that the weighting of the US dollar in the basket of currencies against which the renminbi is set should be reduced, reducing the impact that changes in the US dollar would have on the value of the renminbi. The market read this as a prelude to China allowing the dollar to weaken and its own currency to strengthen.

On Wednesday Mr. Yu Yongding was quoted by the same newspaper as saying that Chinese firms should get ready for a strengthening of the yuan (renminbi) in the next one to two years. The "fuller the preparations, the better," he said. He went on to say that China's current account surplus and America's current account deficit are reflections of savings and investment imbalances in the two countries. He also said that the dollar would probably weaken unless the United States tackles its current account deficit.

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