I was catching up on some blog reading and saw something interesting from Brad Setser:
There is a tendency to equate the RMB/ dollar with the RMB. That most often shows up in tendency to equate an appreciation of the RMB against the dollar with an appreciation of the RMB. That is a mistake. If the dollar is depreciating against other currencies, the RMB can appreciate against the dollar and still depreciate against most of the world.
Brad proposes the following currency measure:
The following chart – which was inspired by a suggestion from former Treasury Secretary Summers – shows moves in the RMB against a 40% dollar/ 40% euro (used as a proxy for all European currencies) and a 20% yen basket. That roughly matches the current composition of China’s trade with the G-3 once adjustments are made to account for the large share of China’s trade that goes through Hong Kong.
His G-3 basket is indexed such that June 2005 = 100. Brad’s chart shows some noise in his G-3 series but there has been almost no net change from June 2005 to September 2007. We show the components by graphing how many yuan a dollar will buy, how many yuan the yen will buy, and how many yuans the Euro will buy – all indexed such that June 2005 = 100. While the dollar has weakened by about 9 percent and the yen has weakened by about 14 percent, the value of the Euro with respect to the yuan has gone up by over 14 percent. The value of the G-3 basket has therefore declined by less than one percent. Brad compares the value of the yuan to a couple of other currencies as well.