Exit Schumer-Graham; Enter Schumer-Graham-Baucus-Grassley ….

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And exit an undervalued yuan; enter an undervalued yuan and a undervalued yen.

Schumer and Graham are dropping their bill – apparently for good.   It was pretty clear that they were unwilling to force the issue in any case.  Schumer represents New York City as well as Buffalo …

Manipulation and tariffs are out.  Misalignment is in. 

I think it is also quite clear that the Treasury will not find China guilty of manipulation this fall either.  Manipulation is not consistent with Paulson’s reputation as a China hand who works effectively behind the scenes.   Or with his recent rhetoric.  Though, consistent with past practices, it won’t actually issue the report clearing China until after the November elections.

The RMB -- perhaps not coincidentally -- broke through 7.9 today.  2006 may not prove be the year of the yuan, but September certainly has been the month of the yuan.  

Perhaps China is rewarding Paulson.   Or perhaps China’s top leadership decided in either July or August that they would allow a bit more RMB appreciation as part of a broader package of policy steps to cool their economy.

With August’s $19 billion trade surplus and accelerating export growth, it was rather clear that last July’s RMB didn’t devastate China’s export sector, to put it mildly. 

Plus, China presumably wants to show a bit of movement in the RMB in advance of formally announcing that their reserves have topped $1 trillion.

Interestingly, the yen and the RMB seem to be moving in opposite directions.   Just for the Economist (which never lets an opportunity to argue that the RMB isn't really undervalued slip by) let me note that both the yuan and the yen have fallen significantly against the euro since 2001.  The yuan fell first, as it joined the dollar on the way down.  But the yen is now catching up, as it is drifting down against the dollar, the RMB and the euro – 

“Since mid-2001 the yen has fallen by around 35% against the euro, while against the weaker dollar it is little changed. Japanese exporters have also gained competitiveness relative to South Korea, where the won has risen strongly against the dollar during the past year.”

Both the yen and yuan are now quite undervalued.  And both China and Japan have massive non-oil current account surpluses.  If oil ever starts to fall, watch out. 

And I even agree with Dr. Jen to a degree.  One reason for yen weakness is that neither the oil exporters or Asian central banks like holding yen.    Low interest rates.   So the world’s big surpluses all get recycled into euros or dollars.  There isn’t much of a central bank bid for low-yielding yen.

I will be curious to see how rapidly China’s reserves increased in August and September.   The large trade surplus should push reserve growth up.  And if all the talk about the RMB stimulated hot money inflows, watch out.  

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