Yuan a bubble?

It’s everyone favorite time of the year: the Asia-Pacific Economic Cooperation Economic Leaders’ Meetin!* President Obama heads to the summit and his first official visit to China next week. Obama’s trip will be dominated by economic concerns especially trade, and in the case of China, exchange rates. Simon Johnston thinks Obama can convince the Chinese to drop the peg of the yuan to the dollar. Basically, China could end up with a destabilizing capital bubble:

This can have beneficial aspects in any country that is trying to grow fast, but it can also be profoundly destabilizing. Mr. Obama should talk gently about the experience of Japan in the 1980s, the United States this decade, and almost all emerging markets pretty much every decade.

For all the bluster about the Chinese exchange rate problem, I’ve never heard a convincing proposal for how to convince the Chinese government to let the yuan appreciate but I think Johnston has stumbled upon something here. Definitely something for the President, Tim Geithner, Hillary to think about on the flight to Singapore.

*Ok, maybe not everyone’s. But really do check out the Wikipedia section on the photo-ops. Medvedev in a poncho! High comedy.

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