SLOW, STEADY APPRECIATION OF CHINESE YUAN CONTINUES

U.S. Treasury Secretary Henry Paulson wrapped up his now twice yearly meetings with Chinese officials yesterday. Some progress regarding the appreciation of the Chinese currency, the yuan, and food and product safety for Chinese exports to the United States seems to have been made.

From Reuters:

"The Chinese recognize growing inflationary pressures in their economy and that a more flexible currency expands their ability to use monetary policy to stabilize their economy," Paulson said at a closing news conference.

China's central bank, which keeps the currency on a tight leash, let the yuan rise on Thursday to its highest level since it was revalued and depegged from the dollar in July 2005. The bank is battling inflation of 6.9 percent, an 11-year high.

A highlight of the talks was an agreement to increase safety standards for Chinese food and product exports to U.S. markets -- a highly sensitive topic after millions of Chinese-made toys were recalled and American indignity over tainted food and pharmaceuticals from China ran high.

I find it interesting that Paulson is stating that the Chinese recognize that a flexible currency allows them to better fight inflationary pressures. That is a concept that freshman business students seem to grasp, so I would hope that one of the world's economic powers understands it. They have tried fixing prices on some goods and raising the bank reserve rate to slow inflation. When will they try the more economically sound principle of a flexible currency?

As for the increase in safety standards for Chinese food and other products that are exported to the United States, there was plenty of room for improvement. We will have to wait and see if the reports of unsafe Chinese products decrease.