2011 predictions: interest rates around the world

6. China: Walking the tightrope

Petar Kujundzic/Reuters
A Chinese one yuan coin and a 100 yuan banknote are seen in this picture illustration taken in Beijing Dec. 30, 2010. A gradual and modest appreciation of yuan is good for China's economy, a senior Chinese central bank official said in comments published on Thursday. But so far, Beijing has not signaled that it's ready for significant currency appreciation.

No discussion on interest and exchange rates can be complete without noting the role China could play in 2011. China has steadfastly refused to concede its trade advantage by allowing its currency, the yuan, to appreciate against the currencies of its trading partners. Mounting pressure from the West and the need to address rising inflation have resulted in slight rate increases in the past few months, but China has yet to signal that it is prepared to significantly reduce the exchange-rate benefit it holds over its customers.

In truth, China is attempting a delicate balance and while it faces international pressures, it faces equally demanding pressures at home. China’s growth is largely dependent on maintaining a large trade balance surplus to keep its factories running and its rapidly expanding working class employed. Job losses of any magnitude will quickly reveal other cracks in China’s larger economy.

With the economies of the US, Europe, and Japan in recovery mode but still vulnerable, the trade flow imbalance is further exaggerated. Thus, it is unlikely that those regions will increase those economic strains by increasing rates in 2011.

Scott Boyd is a currency analyst with OANDA, an online Forex trading firm with offices in New York, Toronto, Singapore, and Dubai. Neither Mr. Boyd nor OANDA take positions in any currencies.

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